TEST BANK

AUDITING THEORY

Overview

1. Providing quantitative information that management and others can use to make decisions is the
function of
A. Accounting
B. Auditing
C. Finance
D. Management of information systems

2. The series of tasks and records of an entity by which transactions are processed as a means of
maintaining financial records
A. Accounting system
B. Computer information system
C. Control environment
D. Internal control system

3. The expertise that distinguishes auditors from accountants is in the

A. Ability to interpret accounting standards
B. Accumulation and interpretation of evidence
C. Ability to interpret generally accepted accounting principles
D. Requirement to possess education beyond the bachelor’s degree

4. Comprises officers and others who also perform senior managerial functions
A. Audit committee C. Governance
B. Board of directors D. Management

5. An audit conducted to determine whether an entity is following specific procedures or rules set
down by some higher authority
A. Compliance audit C. Financial audit
B. Detailed audit D. Operational audit

6. A review of any part of an organization’s and methods for the purpose of evaluating efficiency
and effectiveness is classified as a(n)
A. Audit of financial statements
B. Compliance audit
C. Operational audit
D. Production audit

7. Operational auditing is primarily oriented toward

A. Past protection provided by existing internal control
 B. Future improvements to accomplish the goals of management
C. The accuracy of data reflected in management’s financial records
D. The verification that a company’s financial statements are fairly presented

8. A typical objective of an operational audit is

A. Make recommendations for improving performance
B. Evaluate the feasibility of attaining the entity’s operational objectives
C. Report on the entity’s relative success in attaining profit maximization
D. Determine whether the financial statements fairly present the entity’s operations

9. Under the law, the chief executive officer of the Commission on Audit is the
A. Chairman C. Commissioner
B. Commission Secretary D. Executive Director

10. One of the government auditing standards which is not observed by independent CPAs in the
private sector is:
A. An evaluation shall be made of the system of internal control
B. A review shall be made of compliance with legal and statutory requirements
C. The audit is to be adequately planned and assistants are to be properly supervised
D. Sufficient competent evidential matter shall be obtained through inspection, observation,
inquiries, and confirmations

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

A. Compliance with government regulations
B. Efficiency and effectiveness of operations
C. Presentation of financial statements in accordance with generally accepted accounting
principles
D. All three of the above are equally difficult

Professional Practice of Accounting

12. The Core Competencies of CPAs include:

A. Assurance and information integrity
B. Objectivity
C. Pursuit of life-long learning and excellence
D. Strategic and critical thinking skills

13. ________ refers to the application of relevant, training, knowledge and experience, within the
context provided by auditing, accounting and ethical standards in making informed decisions
about the course of action that are appropriate in the circumstances of the audit engagement.
A. Compliance C. Professional judgment
B. Professional competence D. Reasonable assurance
 14. While performing services for their clients, professionals have a duty to provide a level of care
which is
A. Free from judgment errors C. Reasonable
B. Greater than average D. Superior

15. “Absence of reasonable care that can be expected of a person in a set of circumstances” is the
definition of
A. Constructive fraud C. Gross negligence
B. Fraud D. Ordinary negligence

Quality Control Standards

16. The policies and procedures adopted by a firm to provide reasonable assurance that all audits
done by the firm are being carried out in accordance with the Objective and General Principles
Governing an Audit of Financial Statements.
A. General controls C. Peer review
B. Internal controls D. Quality controls

17. The main purpose of implementing quality control policies and procedures is:
A. To have a favorable peer review
B. To comply with regulatory agency
C. To standardize the policies and procedures of the audit firms
D. To provide reasonable assurance that audit will be conducted in accordance with PSA

18. A firm should establish and maintain a system of quality control to provide it with reasonable
assurance that:
I. The firm and its personnel comply with professional standards and applicable legal and
regulatory requirements
II. Reports issued by the firm or engagement partners are appropriate in the circumstances
A. I only C. Both I and II
B. II only D. Neither I nor II

19. The firm shall establish policies and procedures designed to provide it with reasonable assurance
that engagements are performed in accordance with professional standards and regulatory and
legal requirements, and that the firm or the engagement partner issue report that are appropriate
in the circumstance. Such policies and procedures shall include:
A. Review responsibilities
B. Supervision responsibilities
C. Matters relevant to promoting consistency in the quality of engagement performance
D. All of the choices

20. The objectives of the quality control policies to be adopted by the audit firm will ordinarily
incorporate:
A B C D
 Skills and competence Yes Yes Yes No
Monitoring Yes No Yes Yes
Professional requirements Yes Yes No Yes

21. The nature and extent of a CPA firm’s quality control policies and procedures depend on
A B C D
The CPA firm’s Yes Yes No Yes
The nature of CPA firm’s practice Yes Yes Yes No
Cost-benefit considerations Yes No Yes Yes

22. Quality control policies and procedures should be implemented at

A B C D
Level of the audit firm Yes Yes No No
Individual audits Yes No Yes No

23. An audit firm should implement quality control policies and procedures designed to ensure that
all audits are conducted in accordance with PSAs or relevant national standards or practices.
These policies and procedures should be implemented
A. On individual audits only
B. At the audit form level only
C. Either at the audit firm level or on individual audits
D. Both at the audit firm level and on individual audits

24. Which of the following is not once of the major concerns of the auditor when establishing quality
control policies and procedures?
A. Billing arrangement C. Ethical requirements
B. Engagement performance D. Independence

25. Which of the following quality control objectives would be least importance to the auditor?
A. Determination of audit fee C. Professional advancement
B. Hiring personnel D. Review and supervision

26. The firm’s system of quality control should include policies and procedures that address each of
the following elements, except
A. Control environment
B. Human resources
C. Relevant ethical requirements
D. Relevant ethical requirements

27. In pursuing a firm’s quality control objectives, a firm should adopt policies and procedures to
enable it to identify and evaluate circumstances and relationships that create threats or reduce
them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw
from the engagement. Which quality control element would be most likely to satisfy?
A. Monitoring
B. Human resources
 C. Ethical requirements
D. Leadership responsibilities for quality within the firm

28. A firm of CPAs may use policies and procedures such as notifying professional personnel as to the
names of audit clients having publicly held securities and confirming periodically with such
personnel that prohibited relations do not exist. This is done to achieve effective quality control
in which of the following areas?
A. Human resources
B. Ethical requirements
C. Acceptance and continuance of clients
D. Leadership responsibilities for quality within the firm

29. The primary purpose of establishing quality control policies and procedures for deciding whether
to accept new client is to
A. Enable the CPA firm to attest to the integrity of the client management
B. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients
C. Minimize the likelihood of association with clients whose management lacks integrity
D. Anticipate before performing any field work whether an unqualified opinion can be expressed

30. A CPA firm’s quality control procedure pertaining to the acceptance of a prospective audit client
would most likely include
A. Consideration of whether sufficient competent evidential matter may be obtained to afford
a reasonable basis for an opinion
B. Consideration of whether the internal control structure is sufficiently effective to permit a
reduction in the required substantive tests
C. Inquiry of management as to whether disagreements between the predecessor auditor and
the prospective client were resolved satisfactorily
D. Inquiry of third parties, such as the prospective client’s bankers and attorneys, about
information regarding the prospective client and its management

31. A quality control policy that requires personnel in the firm to adhere to independence, integrity,
objectivity, confidentiality and professional behavior, relates to
A. Assignment C. Professional requirements
B. Monitoring D. Skills and competence

32. Which of the following is an element of a CPA firm’s quality control system that should be
considered in establishing its quality control policies and procedures?
A. Assigning personnel to engagements
B. Complying with laws and regulations
C. Considering audit risk and materiality
D. Using statistical sampling techniques

33. In pursuing the firm’s quality control objectives with respect to assigning personnel to
engagements, the auditor may use policies and procedures such as
 A. Evaluate client’s upon occurrence at specified events to determine whether the relationships
ought to be continued
B. Designating senior qualified personnel to provide advice on accounting or auditing questions
throughout the engagement
C. Establishing at entry levels a policy for recruiting that includes minimum standards of
academic preparation and accomplishments
D. Requiring timely identification of the staffing requirements of specific engagements so that
enough qualified personnel can be made available

34. In pursuing a CPA firm’s quality control objectives, a CPA firm may maintain records indicating
which partners or employees of the CPA firm were previously employed by the CPA firm’s client
as this may create threat to CPA’s independence. Which quality control element would this be
most likely to satisfy?
A. Assignment C. Professional requirements
B. Monitoring D. Skills and competence

35. This involves informing assistants of their responsibilities and the objectives of the procedures
they are to perform. It also involves informing them of matters such as the nature of the entity’s
business and possible accounting and auditing problems that may affect the nature, timing and
extent of audit procedures with which they are involved.
A. Delegation C. Review
B. Direction D. Supervision

36. Which of the following quality control procedures does not relate to skills and competence?
A. Advancement C. Hiring
B. Direction D. Professional development

37. Which of the following is one of the elements of a CPA firm’s quality control system?
A. Complying with laws and regulations
B. Considering audit risk and materiality
C. Delegation
D. Using statistical sampling techniques

38. Which of the following is a policy that must be established to comply with the quality control
element of delegation?
A. Whenever necessary, personnel should seek assistance from knowledgeable persons within
or outside the firm
B. The continued adequacy and operational effectiveness of quality control policies and
procedures are to be observed
C. There is a sufficient direction, supervision, and review of work performed at all levels to
provide reasonable assurance that the work performed meets appropriate standards quality
D. The firm is to be staffed by personnel who have attained and maintain the technical standards
and professional competence required to enable them to fulfil their responsibilities
39. Which of the following procedures does not pertain to the quality control policy of delegation?
A. Provide procedures for planning audits
B. Provide on-the-job trainings during performance of audits
C. Provide procedures for maintaining the firm’s standards of quality for the work performed
D. Plan to personnel needs of the firm on an overall basis and for individual practice offices

40. In connection with the element of consultations, a CPA firm’s system of quality control should
ordinary provide that all personnel
A. Provide procedures for planning audits
B. Have the knowledge required to enable them to fulfill responsibilities assigned
C. Review and test compliance with the firm’s quality control policies and procedures
D. Seek assistance from persons having appropriate levels of knowledge, judgment, and
authority

41. Maintaining or providing access to adequate reference libraries and other authoritative sources
is a procedure that is most likely performed to comply with the policy of
A. Assignment C. Monitoring
B. Consultation D. Skills and competence

42. In reviewing the audit work performed, the engagement partner:

A. Must review all audit documentation
B. Need not review all audit documentation
C. Need not review all audit documentation but may do so
D. Must ask the staff performing the audit work to sign the audit report

43. The work performed by the assistants should be reviewed by personal of at least equal
competence to consider all of the following except:
A. The objectives of the audit have been achieved
B. The work was adequately performed and documented
C. The conclusions expressed are consistent with the results of the work performed
D. The engagement personnel-maintained independence in the performance of the examination

44. Quality control policies and procedures should provide the firm reasonable assurance that the
policies and procedures relating to the other elements of quality control are being effectively
applied. This statement defines the quality control element of
A. Planning
B. Monitoring
C. Assignment
D. Independence, integrity, and objectivity

45. The firm shall obtain written confirmation of compliance with its policies and procedures on
independence from all firm personnel required to be independent by relevant ethical
requirements
A. At least annually
 B. At least monthly
C. At least semi-annually
D. At the completion of each engagement

46. It is the process designed to provide an objective evaluation, before the auditor’s report is issued,
of the significant judgements the engagement team made and the conclusions they reached in
formulating the auditor’s report:
A. Engagement of quality control review
B. Monitoring
C. Peer review
D. Performance review

47. Which of the following statements is false?

A. The firm’s quality control policies and procedures need not be documented and
communicated to the firm’s personnel
B. The firm should establish policies and procedures requiring appropriate documentation to
provide evidence of the operations of each element of its system of quality control
C. The firm should obtain written confirmation of compliance with its policies and procedures
on independence from all firm personnel required to be independent by the Code of Ethics
D. The firm should establish policies and procedures designed to provide it with reasonable
assurance that the firm and its personnel comply with relevant ethical requirements

Accountancy Law

48. A member in public practice may not perform a contingent fee any professional services for a
client for whom the member or member’s firm performs
A. A review
B. An audit
C. Either an audit or review
D. Any service regardless of the specific nature of the service

49. A CPA firm should decline an offer to perform management advisory services engagement for a
non-public company if
A. The proposed engagement is not accounting -related
B. Recommendations made by the CPA firm are to be subject to review by the client
C. The CPA firm audits the financial statements of a subsidiary of the prospective client
D. Acceptance would require the CPA firm to make management decisions for an audit client

50. The primary duty to enforce the provisions of RA 9298 and its IRR rest with the
A. AASC C. FRC
B. BOA D. President of the Philippines

51. Who appoints the members of the Board of Accountancy?

A. The chairman of BOA
 B. The president of PICPA
C. The chairman of the PRC
D. The president of the Philippines

52. The PICPA, being the accredited national professional organization, shall renew its certificate of
accreditation once every
A. Two years C. Four years
B. Three years D. Five years

53. Which of the following statements about the composition of the Board of Accountancy is correct?
A. The Board shall be composed of a chairman and fourteen members
B. The Board shall elect a chairman from among its members to serve for a term of three years
C. The four sectors in the practice of accountancy shall as much as possible be equitably
represented in the Board
D. The members of the Board shall be appointed by the President of the Philippines from a list
of three recommendees for each position and ranked by the PICPA, from a list of five
nominees for each position submitted by Accredited Professional Organization (APO)

54. Which of the following is not one of the qualifications of members of the Board of Accountancy?
A. Must not be a director or officer of PICPA at the time of appointment
B. Must be of good moral character and must not have been convicted of crimes involving moral
turpitude
C. Must be a natural born Certified Public Accountant with at last fifteen (15) years of work
experience in any area of practice of accountancy
D. Must not have any pecuniary interest, directly or indirectly, in any school, college, university
where review classes in preparation for the licensure examination are being offered and
conducted

55. The following statements relate to the term of office of the chairman and the members of the
Board of Accountancy (BOA)
I. A person may serve in the Board for more than 12 years
II. Appointment to fill up an unexpired term shall be considered a complete term
III. A person cannot service in the Board of Accountancy for more than six successive years
IV. No person who has served two (2) successive complete terms shall be eligible for
reappointment until the lapse of one (1) year
A. Only I and IV are false
B. Only I and II and IV are false
C. Only II, III and IV are false
D. All statements are false

56. Which of the following is not among the qualifications of a member of the Board of Accountancy?
A. He/she must be a good moral character
B. He/she must be a natural-born Filipino citizen and a resident of the Philippines
C. He/she must have at least 10 years of experience in the practice of public accountancy
 D. He/she must not be a director or officer of the accredited national professional organization
at the time of appointment

57. According to the Philippine Accountancy Act of 2004 (RA 9298), the following are the
qualifications of applicants for CPA Examinations, except
A. He or she must be of age
B. He or she must a Filipino citizen
C. He or she must of B.S. Accountancy degree holder
D. He or she must not have been convicted of any criminal offense involving moral turpitude

58. The Board of Accountancy shall submit to the ________ the ratings obtained by each candidate
within 10 days after the examination, unless extended for just cause
A. PICPA C. President of the Philippines
B. PRC D. Securities and Exchange Commission

59. 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. Two years C. Four years
B. Three years D. Five years

60. The Board of Accountancy may issue certificate of registration and professional identification card
to any successful examinee:
A. Of unsound mind
B. Convicted by a court of political offense
C. Guilty of immoral or dishonorable conduct
D. Who has falsely represented himself/herself in his/her application for examination

61. A candidate who fails in to complete CPA Board Examinations shall be disqualified from taking
another set of examination unless he or she submits evidence to the satisfaction of the Board that
he or she enrolled in and completed at least
A. 16 units of subjects given in the licensure examination
B. 18 units of subject given in the licensure examination
C. 21 units of subject given in the licensure examination
D. 24 units of subject given in the licensure examination

62. Which of the following statements is correct about the PRC CPE Council?
A. The Council shall be composed of six members and a chairperson
B. The Council shall be composed of two members and a chairperson
C. The Chairperson and the members of the Council shall have a term of three years renewable
for another term
D. The members of the Council shall be appointed by the Commission upon recommendation of
the Board in coordination with APO
63. All CPA’s who are considered in the practice of accountancy shall abide by the requirements, rules,
and regulations on continuing professional education. For this purpose, it is required that all
registered CAPA’s must complete a minimum of
A. 15 credit units per year
B. 20 credit units per year
C. 45 credit units in three years
D. 90 credit units in three years

64. Which of the following is not a valid ground for suspension or removal of members of the Board
of Accountancy?
A. Violating RA 9298
B. Neglect of duty or incompetence
C. Rigging the CPA licensure examination results
D. Being charged of crimes involving moral turpitude

65. A CPA is not allowed to practice public accountancy if the form of business organization is
A. A sole proprietorship
B. A general partnership
C. A limited liability partnership
D. A corporation, whose stockholders are all CPA’s

66. According to RA 9298, if a partner dies, the surviving partners may continue to practice under the
existing form title which includes the deceased partner’s name
A. Indefinitely
B. For a period of time not to exceed two years
C. For a period of time not to exceed five years
D. Until the partnership pay-out to the deceased partner’s estate is terminated

67. A CPA firm name may include

A. Fictitious names
B. Incorporated
C. Name(s) of the following partner
D. Specialization

68. If the application for registration to practice public accountancy of Tiu and Co. CPA’s, was
approved on July 31, 2020, the registration shall expire on
A. September 30, 2022 C. July 31, 2023
B. December 31, 2022 D. September 30, 2023

69. A certificate of accreditation shall be issued to CPA’s in public practice only upon showing in the
accordance with rules and regulations promulgated by the Board and approved by the PRC, that
such registration has acquired a minimum of _________ year’s meaningful experience in any
areas of public practice including taxation.
 A. 2 C. 4
B. 3 D. 5

70. The following statements relate to the RA 9298. Which statement is true?
A. Insanity is not a ground for proceeding against a CPA
B. No person shall be appointed a member of the Board of Accountancy unless he has been in
the practice of accountancy for at least 3 years, among others
C. After two years, subject to certain conditions, the Board of Accountancy may order the
reinstatement of a CPA whose certificate of registration has been revoked
D. The Professional Regulation Commission has the authority to remove any member of the
Board of Accountancy for negligence, incompetence, or any other just cause

Code of Ethics

71. Ethical principles governing audit of financial statements do not include:

A. Competence and due care
B. Independence
C. Professional responsiveness
D. Technical standards

72. The firm shall establish policies and procedures designed to provide it with reasonable assurance
that the firm and its personal comply with relevant ethical requirements. The Code of Ethics for
Professional Accountants in the Philippines establishes the fundamental principles of professional
ethics which include the following, except
A. Integrity C. Professional behavior
B. Objectivity D. Relevance

73. A CPA is allowed to accept referral fee for recommending a client to another CPA if
A. The client pre-approves the transaction
B. Payment of the referral fee is disclosed to the client
C. The client approves of the transaction either before or after the event
D. None of the above is true. Referrals are never acceptable

74. Which of the following describes most completely how the profession defines independence?
A. Resisting a client’s reluctance to reveal evidence
B. Performing an audit from the public’s point of view
C. Avoiding the appearance of a significant interest in an audit client’s interest
D. Accepting responsibility to act professionally and in accordance with the Professional Code of
Conduct

75. “Independence” in auditing means

A. Remaining aloof from client
B. Taking an unbiased viewpoint
C. Being an advocate for the client
 D. Not being financially dependent on client

76. When CPAs are able to maintain an independent attitude in fulfilling their responsibility, it is
referred to as independence
A. In appearance C. In fact
B. In conduct D. In total

77. Although it is possible to take extreme position that anything affecting either independence in
fact or in appearance must be eliminated to ensure a high level of respect in the community, the
difficulty with his position is that it is likely to restrict significantly
A. The services offered to clients
B. The ability of CPA firms of competent staff
C. The freedom of CPA’s to practice in the traditional manner
D. All three of the above

78. CPA Ela Santos performs the audit of the local symphony society. Because of her good work, she
was elected an honorary member of the board of directors. Ela will not be considered
independent unless:
A B C D
The position is in fact purely honorary Yes Yes Yes Yes
Listings of directors show she is a No Yes Yes No
honorary director
She restricts participation strictly to the Yes No Yes No
use of her name
She does not vote or participate in Yes Yes Yes Yes
management functions

79. Not included as “direct financial interest” of the CPA would be financial interests of a
A. Spouse
B. Dependent child
C. Relative support by the CPA
D. CPA in mutual fund which had an ownership interest in client company

80. According to the profession’s ethical standards, an auditor would be considered independent in
which of the following instances?
A. The client owes the auditor fees for two consecutive annual audits
B. An employee of the auditor donates service as treasurer of a charitable organization that is a
client
C. The auditor is also an attorney who acts as the client’s legal counsel in a resolution of legal
dispute
D. The auditor’s checking account, which is fully insured by a federal agency, is held at a client
financial institution
81. CPA’s may provide bookkeeping services to their non-public audit clients, but there are a number
of conditions that must be met if the auditor is to maintain his/her independence. Which of the
following conditions is not necessary?
A. The CPA must not assume a management role or function
B. The client must accept responsibility for the financial statements
C. The auditor must comply with PSA when auditing work prepared by his/her firm
D. The client must hire an external CPA to approve all of the journal entries prepared by the
auditor

82. These services may include such activities as acting as an expert witness, calculating estimated
damages or other amounts that might become receivable or payable as the result of litigation or
other legal dispute, and assistance with document management and retrieval in relation to a
dispute or litigation
A. Paralegal services
B. Litigation support services
C. Client representation services
D. Corporate finance and similar activities

83. Legal services are defined as:

A. A broad range of services, including compliance, planning, provision of formal taxation
opinions and assistance in the resolution of tax disputes.
B. Any services for which the person providing the services must either be admitted to practice
before the Courts of jurisdiction in which such services are to be provided or have the required
legal training to practice law
C. The making of assumptions with regard to future developments, the application of certain
methodologies and techniques, and the combination of both in order to compute a certain
value, range of values, for an asset, a liability or of a business as a whole
D. May include such activities as acting as an expert witness, calculating damages or other
amounts that might become receivable or payable as the result of litigation or other legal
dispute, and assistance with document management and retrieval in relation to a dispute or
litigation

84. What kinds of threats are created by virtue of a close business relationship with assurance clients?
A. Familiarity threat
B. Self-interest threat
C. Self-interest and intimidation threat
D. Self-interest and self-review threat

85. The recruitment of a senior management for an assurance client, such as those in a position to
affect the subject of the assurance engagement may least likely create
A. Advocacy threat C. Intimidation threat
B. Familiarity threat D. Self-interest threat
86. Family and personal relationships between a member of the assurance team and a director, an
officer or certain employees, depending on their role, of the assurance client, least likely create
A. Familiarity threat C. Self-interest threat
B. Intimidation threat D. Self-review threat

87. The provision of services by a firm or network firm to an audit client that involve the design and
implementation of financial information technology systems that are used to generate
information forming part of a client’s financial statements may most likely create
A. Familiarity threat C. Self-interest threat
B. Intimidation threat D. Self-review threat

88. The lending of a staff by a firm or network firm to an audit client may create a ___________ threat
when the individual is in a position to influence the preparation of a client’s accounts or financial
statements
A. Familiarity threat C. Self-interest threat
B. Intimidation threat D. Self-review threat

89. If the valuation services involve the valuation of matters material to the financial statements and
the valuation involves a significant degree of subjectivity, the self-review threat created (choose
the incorrect one)
A. Such valuation services should not be provided
B. Could be reduced to an acceptable level by the application of safeguards
C. Could not be reduced to an acceptable level by the application of any safeguard
D. The assurance team should withdraw from the audit engagement, if the team opted to
perform the valuation services

90. The provision of accounting and bookkeeping services to audit clients in emergency or other
unusual situations when it is unpractical for the audit client to make other arrangements, would
not be considered to be unacceptable threat to independence provided:
A. The audit clients accept responsibility for the results of the work
B. Personnel providing the services are not members of the assurance team
C. The firm or network firm does not assume any managerial role or make any managerial
decisions
D. All of the above

91. Waste management and Enron are classic cases wherein the media was critical that auditors:
A. Have failed to plan the audit engagement properly
B. Received significant consulting fees relative to audit fees
C. Were ignorant of the existing audit and assurance standards
D. Overlooked suspicions of earnings management reported in the Wall Street Journal

92. Work environment safeguards to eliminate or reduce threats for a professional accountant in
public practice to an acceptable level include the following, except
A. Absence of disciplinary mechanism to promote compliance with policies and procedures
 B. Documented internal policies and procedures requiring compliance with the fundamental
principles of quality controls
C. Policies and procedures to monitor and if necessary, manage the reliance on revenue received
from a single client
D. Using different partners and engagement teams with separate reporting lines for the
provision of non-assurance services to an assurance client

93. If firm, or network firm, personnel providing such assistance make management decisions, the
self-review threat created could not be reduced to an acceptable level by any safeguards.
Examples of such managerial decisions include the following except
A. Authorizing or approving transactions
B. Assisting an audit client in resolving account reconciliation problems
C. Preparing source documents or originating data (including decisions on evaluation
assumptions), or making changes to such documents or data
D. Determining or changing journal entries or the classifications for accounts or transactions or
other accounting records without obtaining the approval of the audit clients

94. The Code of Professional Ethics would most likely be violated if an auditor:
A. Has an insured account with a brokerage firm audit client
B. Is engaged by an audit client to identify potential acquisitions
C. Owns a building and leases floor space to an assurance client
D. Screens candidates for an audit client’s vacant controllership position

95. Which of the following is a violation of the code of ethics for professional accountants in the
Philippines?
A. Based on information obtained in an audit, a CPA reports an illegal act of his client to
government authorities
B. A CPA running for public office uses the professional designation “CPA” after his name on
posters employed in connection with his election campaign
C. A CPA firm permits his/her name to be used in a client’s advertising as having verified financial
data and/or statistical facts with respect to the client’s product
D. Three years after a partner has retired, the remaining partners continue to practice under a
firm name that includes the name of the retired partner. The retired partner has severed all
connections with the CPA firm

96. On August 29, 2020, Mar Bonafe, CPA and partner, was offered and accepted the engagement to
audit the annual financial statements of ABC Corporation for the fiscal and calendar years ended
December 31, 2020. The audit began on September 15, 2020 and ended on March 17, 2021. ABC
Corporation is regulation by the SEC. Bonafe served as controller of ABC Corporation from
November 5, 2013 until January 12, 2020, at which time he terminated his employment with ABC.
Mar Bonafe owned a material amount of ABC Corporation’s ordinary shares from November 5,
2013 until August 15, 2020, at which time he sold the shares. Is Mar Bonafe in violation of the
Code of Ethics due to impairment of independence?
A. Yes, because Mar Bonafe served as a controller for ABC Corporation in previous years
 B. Yes, because Mar Bonafe owned ABC shares at the start of the audit for December 31, 2020
C. Yes, because it is still less than a year since Mar Bonafe has owned shares in ABC Corporation
D. Yes, because Mar Bonafe had an employment relationship with the client during part of the
periods covered by the financial statements

97. A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for
the CPA’s minor child. The trust securities were not material to the CPA but were material to the
child’s personal and worth. Would the independence of the CPA be considered to be impaired
with respect to the client?
A. No, because the CPA would not be considered to have a direct financial interest in the client
B. No, because the CPA would not be considered to have a material indirect financial interest in
the client
C. Yes, because the stock would be considered an indirect financial interest that is material to
the CPA’s child
D. Yes, because the stock would be considered a direct financial interest and, consequently,
materiality is not a factor

98. Pupung, CPA is an audit manager of Dom, Day and Jordan, CPAs, accounting firm. He has just been
assigned to the audit of the Lugao Money Market Fund. Pupung has maintained a money market
account with LMMF since it opened in 2015. All his savings, amounted to 75% of his total assets,
are in this account, which pays the highest interest available in money market funds. However,
this account constitutes only 0.0001 percent of the fund’s asset. Is the audit firm’s independence
impaired in this situation?
A. No. Pupung, despite being a “member of the assurance team” holds only 0.0001 percent of
the fund’s assets. His financial interest in LMMF is irrelevant to the question on independence
B. Yes. Pupung is considered a member of the assurance team, since he is a manager and will
provide audit services to LMMF. The firm’s independence is impaired since Pupung holds a
direct financial interest
C. Yes. Pupung is considered a member of the assurance team, since he is a manager and will
provide audit services to LMMF. The firm’s independence is impaired since Pupung holds a
material indirect financial interest
D. No. Pupung, despite being a “member of the assurance team” holds only 0.0001 percent of
the fund’s assets. It is the audit partner in charge of the LMMF engagement (and not Pupung)
who should be checked for any direct or material indirect financial interest in the audit client

Questions 99 through 101 are based on the following information.

CPA Dagul’s wife owns 20 percent of the ordinary shares of Pugad Company, which wants Dagul to
perform the audit for the calendar year ended December 31, 2020.

99. May Dagul perform the audit of Pugad Company for the year ended December 31, 2020?
A. Yes, since it is Dagul’s wife who owns the shares not Dagul
B. No, since Dagul’s wife interest is attributed to him, and he would not be independent
 C. Yes, because the interest is less than 50 percent and therefore Dagul is considered
independent
D. No, since Dagul’s wife’s interest constitutes a significant influence and gives rise to an
intimidation threat

100. Assume that Dagul’s wife gave her shares to their dependent 10-year-old daughter. Tiny, on July
1, 2020. May Dagul now perform the audit of Pugad Company for the calendar year ended
December 31, 2020.
A. No, for as long as Tiny is a dependent child. The financial interest is considered direct
B. No, for as long as tiny is a dependent child. The financial interest is considered indirect
C. Yes, because Dagul is now considered independent since it is his daughter who now owns
the shares
D. Yes, because under the Code of Ethics, the interest in Pugad company is no longer relevant
to Dagul’s decision whether to accept or decline the audit engagement

101. Assume further that Tiny, acting through an appropriate custodian sold the shares to her
grandfather Lolo Dom on August 1, 2020. His purchase, as an accommodation, took two-thirds
of his retirement savings. May Dagul now perform the audit of Pugad Company for the calendar
year ended December 31, 2020.
A. Yes, but only if Lolo Dom is not Dagul’s father (i.e., Lolo Dom is Dagul’s father-in-law)
B. No, the appearance of independence is impare. Moreover, the grandfather’s investment is
material (66.67%) in relation to his net financial resources
C. No, the independence in mental attitude is impaired. Moreover, the grandfather’s
investment is material (66.67%) in relation to his net financial resources
D. Yes, Dagul may now accept the engagement since there is not impairment of independence.
Lolo Dom is considered a non-dependent close relative

102. A network is:

A B C D
That is aimed at cooperation Yes No Yes No
That is clearly aimed at profit or cost-sharing
or shares common ownership, control or
management, common quality control
policies and procedures, common business Yes Yes No No
strategy, the use of a common brand name,
or a significant part of professional resources

Attestation, Assurance, Audit

Attestation

103. Which of the following statements is true when the CPA has been engaged to do an attestation
engagement?
A. As long as CPA firms are competent, it is not required that they remain unbiased
 B. The CPA firm is engaged and paid by the client, but the primary beneficiaries of the audit
are the statement users
C. The CPA firm is engaged and paid by the client; therefore, the firm has primary responsibility
to be an advocate for the client
D. Should a situation arise when there is no convincing, authoritative standard available, and
there is a choice of actions which could impact client’s financial statements either positively
or negatively, the CPA is free to endorse the choice which is in the client’s interests

Assurance

104. The level of confidence that a practitioner provides about the reliability of an assertion is called
A. Assurance C. Materiality
B. Audit risk D. Precision

105. The auditor’s satisfaction as to the reliability of an assertion being made by one party is called:
A. Assurance C. Materiality
B. Audit risk D. Precision

106. Which of the following is an assurance engagement?

A. Agreed-upon procedures
B. Compilation
C. Review
D. Taxation

107. The Philippine Framework for Assurance Engagements

A. Establishes standards and provides procedural requirements for the performance of
assurance engagements
B. Contains basic principles, essential procedures, and related guidance for the performance
of assurance engagements
C. Provides a frame of reference for CPAs in public practice when performing audits, reviews,
and compilations of historical financial information
D. Defines and describes the elements and objectives of an assurance engagement, and
identifies engagements to which PSAs, PSREs, and PSAEs apply

108. The Philippine Framework for Assurance Engagements identifies two types of assurance
engagements a practitioner is permitted to perform: a reasonable assurance engagement and
a limited assurance engagement. Which of the following is the objective is the objective of a
limited assurance engagements?
A. 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
B. A reduction in assurance engagement risk to an acceptably low level in the circumstances
of the engagement as a basis for a positive from of expression of the practitioner’s
conclusion
 C. 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
D. A reduction in assurance engagement risk to a level that is acceptable in the circumstances
of the engagement as a basis for a modified form of expression of the practitioner’s
conclusion

109. Criteria need to be available to the intended users in an assurance engagement to allow them
to understand how the subject matter has been evaluated or measured. Which of the following
is not among the ways by which these criteria could be made available to the intended users?
A. Publicly
B. Through inclusion in the firm’s office policy manual
C. Through inclusion in a clear manner in the assurance report
D. Through inclusion in a clear manner in the presentation of the subject matter information

110. The subject matter of an assurance engagement can take the following forms, except
A. The entity’s internal control
B. Evaluation of a capital investment proposal
C. Historical or prospective financial statements
D. Performance of an entity that could indicate efficiency and effectiveness

111. The decision as to whether the criteria are suitable involves considering whether the subject
matter of the assurance engagement is capable of reasonable consistent evaluation or
measurement using such criteria. Which of the following characteristics is not considered
necessary in determining whether the criteria are suitable?
A. Neutrality C. Reliability
B. Relevance D. Sufficiency

112. What level of assurance does an accountant give on an audit report?

A. None C. Moderate
B. Low D. High

113. The statement that nothing came to our attention which would indicate that these statements
are not fairly presented expresses which of the following?
A. Adverse report C. Negative assurance
B. Disclaimer of opinion D. Negative confirmation

114. Which of the following services provides a moderate level of assurance?

A. Agreed-upon procedures C. Compilation
B. Audit D. Review

115. What level of assurance does on accountant give on compilation report?

A. None C. Moderate
B. Low D. High
 116. What level of assurance does the CPA provide under the following engagements?

A B C D
Audit High High Moderate Reasonable
Review Moderate Limited Moderate Negative
Agreed-upon procedure None Low None None
Compilation None None None Low

Audit

117. The objective of an audit of financial statement is

A. To assist an entity in the preparation of financial statements
B. To guarantee that all material misstatements in the financial statements are detected
C. To express an opinion whether the financial statements are prepared in all material
respects, in accordance with an identified financial reporting framework
D. To enable an auditor to state whether, on the basis of the procedures performed, anything
has come to the auditor’s attention that causes the auditor to believe that the financial
statements are not prepared, in all material respects in accordance with an identified
financial reporting framework

118. Which of the following statements does not describe a condition that creates a demand for
auditing?
A. Users can directly assess the quality of information
B. Expertise is often required for information preparation and verification
C. Information can have substantial economic consequences for decision-maker
D. Conflict between an information preparer and a user can result in biased information

119. Which of the following is none of the limitations of an audit?

A. The possibility that management may prevent the auditor from performing the necessary
audit procedures
B. The risk that the auditor may not possess the training and proficiency required by the
engagement
C. The fact that most audit evidence supporting the financial statements is persuasive rather
than conclusive in nature
D. The likelihood that the auditor may not be able to detect material misstatements in the
financial statements because the auditor was engaged only after the client’s year-end

120. Which of the following is not one of the limitations of an audit?

A. The use of testing
B. Error in the application of judgment
C. Inherent limitation of internal control
D. Scope limitations imposes by the entity
121. Which of the following statements does not properly describe a limitation of an audit?
A. Many financial statement assertions cannot be audited
B. The work undertaken by the auditor is permeated by judgment
C. Fatigue and human weakness can cause auditors to overlook pertinent evidence
D. Many audit conclusions are made on the basis of examining a sample of evidence

122. Which of the following statements does not properly describe an element of the theoretical
framework of auditing?
A. An audit benefits the public
B. Auditors act on behalf of management
C. The data to be audited can be verified
D. Short-term conflicts may exist between managers who prepare the data and auditors who
examine the data

123. Which of the following statements about theoretical framework of the auditing is (are)
incorrect?
I. The data to be audited can be verified
II. Long-term conflicts may exist between managers who prepare the data and auditors who
examine the data
III. Auditors act on behalf of management
IV. An audit benefits the public
A. II only C. II and III only
B. III only D. II, III and IV only

124. Which of the following is not one of the general principles governing the audit of financial
statements?
A. The auditor should conduct the audit in accordance with PSA
B. The auditor should comply with the Philippine Code of Professional Ethics
C. The auditor should plan and perform the audit with an attitude of professional skepticism
D. The auditor should obtain sufficient appropriate evidence primarily through inquiry and
analytical procedures to be able to draw conclusions

125. The best statement of the responsibility of the auditor with respect to audited financial
statements is:
A. The audit of the financial statements relieves management of its responsibilities
B. The auditor is responsible only to his qualified opinion but not for any other type of opinion
C. The auditor’s responsibility is confined to his expression of opinion about the audited
financial statements
D. The responsibility over the financial statements rests with the management and the auditor
assumes responsibility with respect to the notes of financial statements

126. Which of the following statements about independent financial statement audit is correct?
A. The work undertaken by auditor is permeated by judgment
 B. An audit is designed to provide absolute assurance that the financial statements taken as a
whole are free from material misstatements
C. The procedures required to conduct an audit in accordance with PSA should be determined
by the client who engaged the services at the auditor
D. The auditor’s opinion is an assurance as to the effectiveness and efficiency with which
management has conducted the affairs of the entity

127. Which of the following statements about the independent financial statement audit is
incorrect?
A. The auditor’s opinion enhances the credibility of the financial statements
B. The phrase used to express the auditor’s opinion is “present fairly, in all material respects”
C. The risk that the auditor will fail to uncover material misstatement is eliminated when the
auditor complies with PSA
D. The term “scope of the audit” refers to audit procedures deemed necessary in the
circumstances to achieve the objective of the audit

128. Which of the following is incorrect about responsibility for financial statements?
A. Management is responsible for fair presentation of the financial statements
B. Audit of financial statements does not reduce management’s responsibility
C. Auditor is responsible for expressing an opinion on the financial statements
D. Fair presentation of financial statements is an implicit part of the auditor’s responsibility

129. Which of the following types of audit is performed to determine whether an entity’s financial
statements are fairly stated in accordance with an identified financial reporting framework?
A. Compliance audit C. Operational audit
B. Financial statement audit D. Performance audit

130. In financial statement audits, the audit process should conform with
A. The audit program
B. The auditor’s judgment
C. Philippine Standards on Auditing
D. Philippine Financial Reporting Standards

131. An audit of financial statements is conducted to determine whether, the

A. Organization is operating efficiency and effectively
B. Entity is following specific procedures or rules set down by some higher authority
C. Members of the management team are fulfilling their fiduciary responsibilities to
shareholders
D. None of the above

132. The essence of financial statement audit is to

A. Detect fraud
B. Determine whether the client’s financial statements are fairly stated
C. Assure the consistent application of correct accounting procedures
 D. Examine individual transactions so that the auditor may certify as to their validity

133. The objective of an audit of financial statement is…

A. To enable the auditor to express an assurance that there is unassailed credibility of the
financial statements
B. To enable the auditor to express an opinion whether the financial statements are prepared,
in all material respects, in accordance with generally accepted auditing standards
C. To enable the auditor to express an opinion whether the financial statements are prepared,
in all material respects, in accordance with an identified financial reporting framework
D. To enable the auditor to state whether on the basis of procedures, anything has come to
the auditor’s attention that causes the auditor to believe that the financial statements are
not prepared in all material respects, in accordance with an identified financial reporting
framework

134. The objective of an audit of financial statements is

A. To assist an entity in the preparation of financial statements
B. To guarantee that all material misstatements in the financial statements are detected
C. To express an opinion whether the financial statements are prepared, in all material
respects, in accordance with an identified financial reporting framework
D. To enable auditor to state whether, on the basis of procedures performed, anything has
come to the auditor’s attention that causes the auditor to believe that the financial
statements are not prepared, in all material respects in accordance with an identified
financial reporting framework

135. Which of the following best describes the benefit of having an annual financial statement audit?
A. Meet the requirements of the government agencies
B. Provide assurance that errors and fraud, if any exist, will be brought to light
C. Provide assurance to investors and other outsiders that the financial statements are
dependable
D. Enable officers and directors to avoid personal responsibility for any misstatements in the
financial statements

136. Financial statement audit is based on the assumption that financial data are verifiable. Data are
verifiable when two or more qualified individuals.
A. Working together, can agree upon the accuracy of the data
B. Working independently, each reach essentially similar conclusions
C. Working together, can prove, beyond doubt, the accuracy of the data
D. Working independently, can prove, beyond reasonable doubt, the truthfulness of the data

137. The level of assurance provided by the auditor when auditing financial statements is:
A. Limited C. Moderate
B. Low D. Reasonable
138. The objective of the ordinary examination by the independent auditor is the expression of an
opinion on
A. The accuracy of the annual report
B. The fairness of the financial statements
C. The accuracy of the financial statements
D. The balance sheet and income statement

139. Independent auditing can best be described as a

A. Branch accounting
B. Regulatory function that prevents the issuance of improper financial information
C. Discipline that attest to the results of accounting and other operations and data
D. Professional activity that measures and communicates financial and business data

140. The primary purpose of an independent financial statement audit is to

A. Comply with the government regulatory requirements
B. Provide a basis for assessing management’s performance
C. Assure management that the financial statements are unbiased and free from material
error
D. Provide users with an unbiased opinion about the fairness of information reported in the
financial statements

141. The need for independent audits of financial statements can be attributed to all of the following
conditions except:
A. Conflict of interest C. Remoteness
B. Consequence D. Validity

142. Which of the following best describes the reason why an independent auditor reports on
financial statements?
A. A management fraud may exist, and it is more likely to be detected by external auditors
B. The company preparing the statements may have a poorly designed internal control system
C. The company preparing the statements and the persons using the statements may have
different interests
D. A misstatement of account balances may exist and is generally corrected as the result of
the independent auditor’s work

143. By providing a high level of assurance on audit reports on financial statements, the auditor
A. Confirms the accuracy of the financial statements
B. Enhances the credibility of the financial statements
C. Guarantees the fair presentation of the financial statements
D. Assures the readers that fraudulent activities of the entity employees have been defected

144. Which of the following is not among the conditions that gave rise to a demand by external users
for independent audits of financial statements?
A. Remoteness of users
 B. Complexity of subject matter
C. Consequences of misleading financial statements
D. Potential conflict of interest between auditors and preparers of the financial statements

145. The best statement of the responsibility of the auditor which respect to audited financial
statement is:
A. The audit of the financial statements relieves the management of its responsibilities
B. The auditor is responsible only to his qualified opinion but not for any other type of opinion
C. The auditor’s responsibility is confined to his expression of opinion about the audited
financial statements
D. The responsibility over the financial statements rests with the management and the auditor
assumes responsibility with respect to the notes of financial statements

146. Which of the following best describes the reason why auditors cannot provide an absolute
assurance that all material misstatements will be detected?
A. Many financial statement assertions cannot be audited
B. Management is primarily responsible for the fair presentation of the financial statements
C. The auditor does not specifically design audit procedures to detect fraudulent activities
D. There are limitations of an audit that affect the auditor’s ability to detect material
misstatements

147. Which of the following statements about independent financial statement audit is incorrect?
A. The auditor’s opinion enhances the credibility of the financial statements
B. The phrase used to express the auditor’s opinion is “present fairly, in all material respects”
C. The risk that the auditor will fail to uncover material misstatement is eliminated when the
auditor complies with PSA
D. The term “scope of the audit” refers to audit procedures deemed necessary in the
circumstances to achieve the objective of the audit

Review

148. The objective of a review of financial statements is to

A. Express an opinion on the overall financial statements
B. Assist the client in the preparation of the financial statements
C. Carry out audit procedures agreed n with the client and other users of report
D. State whether anything has come to the auditor’s attention that indicates that the financial
statements are not presented fairly

149. In a review engagement, the practitioner and the client should agree on the terms of the
engagement. The agreed terms would be recorded in an engagement letter or other suitable
form such as a contract. The engagement letter should include all of the following except.
A. The objective of the service to be performed
B. A sample of the report expected to be rendered
 C. A provision that the engagement cannot be relied upon to disclose, errors, fraud, or illegal
acts
D. A provision that any errors, fraud, or noncompliance with laws and regulations that come
to the practitioner’s attention need not be reported

150. Performing inquiry and analytical review procedures is the preliminary basis for an auditor to
issue
A. A compliance report C. A review report
B. A report on factual findings D. An audit report

151. Performing inquiry and analytical review procedures is the preliminary basis for CPA to issue
a/an
A. Audit report C. Management advisory
B. Compilation report D. Review report

152. Which of the following procedures is ordinarily performed by CPA in a review engagement of a
non-public entity?
A. Inquiries of the entity’s legal counsel concerning contingent liabilities
B. Analytical review designed to evaluate the effectiveness of internal control
C. Inquiries concerning entity’s procedures for recording and summarizing transactions
D. Analytical procedures designed to test the accounting records by obtaining corroborating
evidential matter

153. Which of the following procedures is not included in a review engagement?

A. Inquiries of management
B. Inquiries regarding subsequent events
C. A study and evaluation of internal control
D. Procedures designed to identify unusual fluctuations

154. Which of the following procedures is a practitioner least likely to perform during a review
engagement?
A. Observing the safeguards over access to and use of assets and records
B. Inquiring of management about actions taken at the board of director’s meetings
C. Comparing the financial statements with the anticipated results in budgets and forecasts
D. Studying the relationships of financial statement elements expected to conform to
predictable patterns

155. The date of the review report should

A. Coincide with the balance sheet date
B. Not be later than the balance sheet date
C. Be earlier than the date on which the financial statements were approved by management
D. Not be earlier than the date on which the financial statements were approved by
management
AICPA Code of Professional Conduct

156. The AICPA’s Code of Professional Conduct requires independence for

A. Assurance engagements only
B. All professional work performed by CPA’s
C. All accounting and auditing services performed
D. All services performed by the CPA’s in public practice

Standard Setting Bodies

157. In the international area, this body oversees the IFAC’s standard-setting activities in the areas
of auditing and assurance, ethics and education
A. Monitoring Group (MG)
B. Public Interest Oversight Board (PIOB)
C. IFAC Regulatory Liaison Group (IRLG)
D. International Auditing and Assurance Standards Board (IAASB)

158. Which of the following functions to promulgate auditing standards?

A. AASC
B. ACPAPP
C. Financial Reporting Standards Council
D. National Accredited Professional Organization

159. Which of the following is not represented in the AASC?

A. Commission on Audit
B. Board of Accountancy
C. Bureau of Internal Revenue
D. Securities and Exchange Commission

160. The sector that is most represented in the Auditing and Assurance Standards Council is the
A. Academe C. Government
B. Commerce and industry D. Public Practice

161. The chairman and the members of the FRSC and AASC shall have a renewable term of
A. 3 years C. 6 years
B. 5 years D. 7 years

Regulatory Agencies

162. Which of the following sanctions is not available to the Securities and Exchange Commission?
A. Revoking the CPA license
B. Suspending the CPA from doing audits of SEC clients
C. Prohibiting the CPA from accepting new SEC clients for six months
D. Requiring the CPA to participate in continuing education programs and make changes in
their practice
 Client Acceptance & Continuance

1. Acceptance and continuance of client relationships and specific audit engagements include
considering all of the following except:
A. Whether the firm and engagement team can comply with ethical requirements
B. The integrity of the principal owners, key management and those charged with governance
of the entity
C. Whether the engagement team is competent to perform the audit engagement and has the
necessary time and resources
D. Whether the internal control of the client is adequate enough to detect and prevent material
misstatement in the financial statements

2. In making a decision to accept or continue with a client, the auditor should consider:
A B C D
Its competence Yes Yes Yes Yes
Its own independence Yes No Yes No
Its ability to service the client properly Yes Yes Yes No
The integrity of the client’s management Yes Yes No Yes

Client acceptance

3. Which of the following is not normally performed in the pre-engagement phase?

A. Assessing the control risk
B. Preparing an engagement letter
C. Inquiring from predecessor auditor
D. Deciding whether to accept or reject an audit engagement

4. Early appointment of independent auditor will enable

A. A more efficient examination to be planned
B. A more thorough examination to be performed
C. Sufficient competent evidential matter to be obtained
D. A proper study and evaluation of internal control to be performed

5. The incoming auditor is also known as the __________ auditor:

A. Other C. Proposed
B. Principal D. Successor

6. The current period’s auditor who did not audit the prior period’s financial statements is called
A. Incoming auditor C. Predecessor auditor
B. Other auditor D. Principal auditor

7. The purpose of having communication between the predecessor and successor is

A. To help the client by facilitating the change of auditors
B. To help successor auditor evaluate whether to accept the engagement
C. To ensure that information which is provided to the SEC will be accurate
 D. To allow predecessor to disclose information which would otherwise be confidential

8. Before accepting an engagement to audit a new client, a CPA is required to obtain

A. The prospective client’s signature to the engagement letter
B. An understanding of the prospective client’s industry and business
C. A preliminary understanding of the prospective client’s control environment
D. The prospective client’s consent to make inquiries of the predecessor auditor, if any

9. What is the responsibility of a successor auditor with respect to communicating with the
predecessor auditor in connection with a prospective new audit client?
A. The successor auditor has no responsibility to contact the predecessor auditor
B. The successor auditor need not contact the predecessor if the successor is aware of all
available relevant facts
C. The successor auditor should obtain permission from the prospective client to contact the
predecessor auditor
D. The successor auditor should contact the predecessor regardless of whether the prospective
client authorizes contact

10. The successor auditor requested permission to communicate with the predecessor auditor and
review certain portions of the predecessor auditor’s work papers. The prospective client’s refusal
to permit this will bear directly on the successor’s decision concerning the:
A. Integrity of management
B. Apparent scope limitation
C. Adequacy of the pre-planned audit program
D. Ability to establish consistency in application of accounting principles between years

11. Which of the following should an auditor obtain from the predecessor auditor prior to accepting
an audit engagement?
A. Analysis of balance sheet accounts
B. Analysis of income statement accounts
C. All matters of continuing accounting significance
D. Facts that might bear on the integrity of management

12. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessor’s
A. Understanding as to the reasons for the change of auditor’s
B. Evaluation of all matters of continuing accounting significance
C. Awareness of the consistency in the application of PFRS between periods
D. Opinion of any subsequent events occurring since the predecessor’s audit report was issued

13. Before accepting an audit engagement, a successor audit should make specific inquiries of the
predecessor audit regarding
A. The predecessor’s assessment of inherent risk and judgments about materiality
B. The predecessor’s evaluation of matters of continuing accounting significance
 C. The degree of cooperation the predecessor received concerning the inquiry of the client’s
lawyer
D. Disagreements the predecessor had with the client concerning auditing procedures and
accounting principles

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 uncertainty inherent in applying sampling procedures
C. The competency of the client’s internal audit state following
D. Disagreements with management as to auditing procedures

15. The predecessor auditor is required to respond to the successor auditor for information, but the
response can be limited to stating that no information will be provided when
A. Client is dissatisfied with predecessor’s work
B. Predecessor believes that client lacks integrity
C. There are legal problems between client and predecessor
D. Predecessor auditor has poor relations with successor auditor

16. Which of the following is not correct regarding the communication between successor and
predecessor auditors?
A. The burden of initiating the communication rests with the successor auditor
B. The burden of initiating the communication rests with the predecessor auditor
C. The predecessor auditor may choose to provide a limited response to a successor auditor
D. The predecessor auditor must receive their former client’s permission prior to divulging
information to the successor auditor

17. An incoming auditor plans to consult the predecessor auditor and review certain portion of the
predecessor auditor’s working papers. This procedure is acceptable if
A. The client consents
B. The incoming auditor consents
C. The predecessor auditor consents
D. The predecessor auditor and the client consent

18. If an auditor believes that an understanding with the client has not been established, he or she
should ordinarily
A. Decline to accept or perform the audit
B. Perform the audit with increased professional skepticism
C. Assess the control risk at the maximum level and perform a primarily substantive audit
D. Modify the scope of the audit to reflect an increased risk of material misstatement due to
fraud

19. Which of the following factors would most likely cause a CPA to decide not to accept a new audit
engagement?
A. Management’s refusal to permit the CPA to perform substantive tests before the year-end
 B. Management’s disregard of its responsibility to maintain an adequate internal control
environment
C. The CPA/s lack of understanding of prospective client’s internal auditor’s computer-assisted
audit techniques
D. The CPA’s inability to determine whether related-party transactions were consummated on
terms equivalent to arm’s-length transactions

Engagement letter

20. Preliminary arrangements agreed to by the auditor and the client should be reduced to writing by
the auditor. The best place to set forth these arrangements is in
A. An engagement letter
B. A client representation letter
C. A confirmation letter attached to the constructive services letter
D. A memorandum to be placed in the permanent section of the auditing working papers

21. The purpose of an engagement letter is to

A. Document the terms of engagement to writing in order to minimize understandings
B. Document the CPA firm’s responsibility to external users of the audited financial statements
C. Notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated
D. All of the above

22. The use of an engagement letter is the best method of documenting

I. The required communication of significant deficiencies in internal control structure
II. Significantly lower materiality levels than those used in the prior audit
III. The description of any letters or reports that the auditor expects to issue
IV. Arrangements concerning the involvement of internal auditors and other client staff
A. I and II C. II and III
B. I and IV D. III and IV

23. 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 engagement Yes Yes No Yes
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

24. Engagement letter that documents and confirms the auditor’s acceptance of the engagement
would normally be sent to the client
A. At the end of fieldwork
B. After the audit report is issued
C. Before the audit report is issued
D. Before the commencement of the engagement
25. 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
Management’s responsibilities Yes No No No
Limitations of engagement No Yes No No

26. Before perming any audit procedures. The auditor and the client should agree on the
A B C D
Type of opinion to be expressed Yes No No Yes
Specific procedures to be performed No Yes No Yes
Terms of engagement Yes Yes Yes Yes

27. Which of the following matters is least likely to be discussed in an engagement letter?
A. Timing of the performance of the examination
B. Assistance to be provided by the client personnel
C. The fact that an auditor does not plan to detect material irregularities
D. The fact that the financial statements are the responsibility of the management

28. Which of the following would be least likely to be included in the auditor’s engagement letter?
A. Forms of any reports
B. Type of opinion to be issued
C. Objectives and scope of the audit
D. Extent of his responsibilities to his client

29. An engagement letter would not normally include

A. Billing arrangement
B. Arrangement concerning client’s assistance
C. Details of the procedures that will be performed
D. Expectation of receiving a representation letter from management

30. Which of the following is not one of the principal contents of an engagement letter?
A. Limitations of the engagement
B. Objectives of the financial statements
C. Unrestricted access to records and documents
D. Management’s responsibility for the financial statements

31. Arrangements concerning which of the following are least likely to be included in engagement
letter?
A. Fees and billing
B. Auditor’s responsibilities
C. CPA investment in client securities
D. Other forms of reports to be issued in addition to the audit report
Client continuance

32. In a continuing engagement, the continuing auditor would most likely send a new engagement
letter when
A. There is a recent change in the client’s board of directors
B. There is a change in the partner assigned to the engagement
C. There are expected minor changes in the nature or size of the client’s business
D. There are new accounting pronouncements affecting the client’s financial statements

33. In which of the following situations would the auditor be unlikely to send a new engagement letter
to a continuing client?
A. A change in terms of the engagement
B. A recent change of client management
C. A significant change in the nature or size of the client’s business
D. A recent change in the partner and/or staff in the audit engagement

34. Which of the following least likely influences the auditor’s decision to send a separate
engagement letter to a component of parent entity client?
A. Legal requirements
B. Who appoints the auditor of the component
C. Degree of ownership over a component entity by parent company
D. Location of the principal place of business of the component entity

Change in nature of engagement

35. Dora, CPA accepted an engagement to audit the financial statements of Tech Resources, a non-
public entity. Before the completion of the audit, Tech requested Dora to change the engagement
to a review of financial statements. Before Dora agrees to change the engagement, Dora is
required to consider the
A B C D
Legal or contractual implication of the request Yes Yes No No
Reason given for Tech’s request Yes No Yes No

36. An accountant who had begun an audit of the financial statements of an entity was asked to
change the engagement to a review. Given reasonable justification for the change, the
accountant’s review report should refer to the
A B C D
Original engagement that was agreed to Yes Yes No No
Procedures that may have been performed Yes No Yes No
in the original engagement

37. Which of the following would not be a valid justification for changing the nature of an
engagement?
A. There was a misunderstanding concerning the original engagement
B. There was a recent change in the client’s requirements for audited financial statement
 C. Three was a management-imposed scope limitation that requires modification of audit
opinion
D. The cost of completing the audit is significant and the client no longer needs audited financial
statement

Withdrawal

38. The auditor would most likely withdraw from the engagement if
A. There are multiple uncertainties affecting the financial statements
B. The auditor discovers material misstatement in the client’s financial statement
C. There is substantial doubt about entity’s ability to continue as a going concern
D. The auditor is unable to agree to a change of the engagement and is not permitted to continue
the original engagement

39. After beginning the audit of a new client, Basko, CPA, discovers that the professional competence
necessary for the engagement is lacking. Basko informs management of the situation and
recommends another CPA, the management engages the other CPA. Under these circumstances,
A. Basko’s lack of competence should be considered to be a violation of the PSAs
B. Basko may request compensation from the client for any professional services rendered to it
in connection with the audit
C. Basko’s request for a commission from the other CPA is permitted because a more competent
audit can now be performed
D. Basko may be indebted to the other CPA since the other CPA can collect from the client only
the amount the client originally agreed to pay Basko

Planning – Risk Assessment

Audit process

40. Which of the following is not valid sequence of steps in the audit process?
A. Choosing audit risk, assessing control risk, determining detection risk
B. Choosing audit risk, performing certain analytical procedures, assessing inherent risk
C. Performing certain analytical procedures, assessing inherent risk, assessing control risk
D. Determining detection risk, assessing inherent risk, performing certain analytical procedures

Engagement risk

41. Which of the following is among the three components of engagement risk?
A. Acceptance risk C. Occurrence risk
B. Control risk D. Rejection risk

Pre-planning
 42. One of the major parts of audit planning is pre-planning. Which of the following is NOT involved
during the pre-planning phase?
A. Obtaining an engagement letter
B. Selecting staff for the engagement
C. Deciding whether to accept or continue this client
D. Obtaining information about client’s legal obligations

Obtain understanding of client’s business & business risk

43. An extensive understanding of the client’s business and industry and knowledge about the
company’s operations are essential for doing an adequate audit. For a new client, most of this
information is obtained.
A. At the client’s premises
B. From the permanent file
C. From the predecessor auditor
D. From the Securities and Exchange Commission

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

45. To obtain an understanding of a continuing client’s business in planning an auditor, an auditor

most likely would
A. Read specialized industry journals
B. Re-evaluate client’s internal control environment
C. Perform tests of details of transactions and balances
D. Review prior-year working papers and the permanent file for the client

46. The auditor should obtain an understanding of the entity’s objective and strategies, and those
business risks that may result in risks of material misstatements. Which of the following
statements concerning the entity’s business risk is incorrect?
A. The auditor has a responsibility to identify or assess all business risks
B. Business risk may arise from the development of new products or services that may fall
C. Business risk is broader than the risk of material misstatement of the financial statements,
though it includes the latter
D. An understanding of the business risks facing the entity increases the likelihood of identifying
risks of material misstatement

Audit risk model

47. This term means “to analyze identified risks to conclude on their significance”:
A. Analyze C. Estimate
B. Assets D. Measure

48. The audit risk model is useful

A. While doing tests of controls
B. In planning an audit engagement
C. To determine the type of opinion to express
D. To evaluate the evidence which has been gathered

49. The audit risk model is

A. A planning, testing, and evaluation model
B. Useful in evaluating results but of limited use in planning
C. Useful in planning, but of limited value in evaluating results
D. Useful when performing the tests of balances, but of little value in either the planning or
evaluation stages

50. A major limitation in the application of the audit risk model is

A. The difficulty in defining the terms of the model
B. The difficulty in measuring the components of the model
C. The failure of the AASC to accept it and incorporate it into the PSA’s
D. The difficulty in understanding the affect on other factors in the model when one factor is
changed

51. The risk that the auditor may unknowingly fail to appropriately modify his or opinion on financial
statements that are materially misstated is:
A. Analytical procedures risk C. Control risk
B. Audit risk D. Inherent risk

52. A measure of the auditor’s assessment of the likelihood that there are material misstatement in
an account before considering the effectiveness of the client’s internal control is
A. Acceptable audit risk C. Inherent risk
B. Control risk D. Statistical risk

53. The susceptibility of an assertion to material misstatements is called

A. Audit risk C. Inherent risk
B. Detection risk D. Sampling risk

54. Auditors begin their assessments of inherent risk during the planning phase. Which of the
following would not be a topic of the planning phase that would also help to assess inherent risk?
A. Identifying related parties
B. Touring the client’s plant and offices
C. Obtaining client’s agreement on the engagement letter
D. Obtaining knowledge about the client’s business and industry
55. Which of the following discoveries by the auditor would NOT raise the red flag of increased
inherent risk?
A. Client is a parent company with a subsidiary
B. A bond indenture requires a current ratio of at least three to one
C. Management bonuses are based on a percentage of net income
D. Client makes extensive use of notes receivable and notes payable rather than buying and
selling on open account basis

56. Inherent risk is reduced where the likelihood of defalcations is low. This would be true for an
account such as
A. Accounts receivable C. Inventory
B. Cash D. Marketable securities

57. The expectation of misstatement after considering the effect of internal control is most
appropriately thought of as
A. Inherent risk
B. Control risk and acceptable audit risk
C. The combination of inherent risk and control risk
D. None of the above

58. The risk that the auditor will not detect a material misstatement that exist in an assertion is:
A. Audit risk C. Detection risk
B. Control risk D. Inherent risk

59. Detection risk is

A. The risk that the auditor gives an inappropriate audit opinion when the financial statements
are materially misstated
B. The risk that an auditor’s substantive procedures will not detect a misstatement that exist in
an account balance or class of transactions that could be material, individually or when
aggregated with misstatements in other balances or classes
C. The susceptibility of an account balance or class of transactions to misstatements that could
be material, individually or when aggregated with misstatements in other balances of classes,
assuming that there were no related internal controls
D. 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

60. Inherent risk and control risk differ from detection risk in that they
A. Are functions of client and its environment
B. Can be changed at the auditor’s discretion
C. Arise from the misapplication of auditing procedures
D. May be assessed in either quantitative or non-quantitative terms
61. Relationship between control risk and detection risk is ordinarily
A. Direct C. Inverse
B. Equal D. Parallel

62. Inherent risk is _________ related to detection risk and _________ related to the amount of audit
evident
A. Directly, directly C. Inversely, directly
B. Directly, inversely D. Inversely, inversely

63. A matter whose outcome depends on the future actions or events not under the direct control of
the entity but that may affect the financial statements
A. Inconsistency C. Significant risk
B. Provision D. Uncertainty

64. Risk in auditing means that the auditor accepts some level of uncertainly in performing the audit
functions. An effective auditor will
A. Set the risk level between 5% and 10%
B. Design audit procedures to achieve the desired level of audit risk
C. Take any means available to reduce the risk to the lowest possible level
D. Perform the audit procedures first and quantitatively set the risk level before forming an
opinion and writing the report

65. A measure of how willing the auditor is to accept that the financial statements may be materially
misstated after the audit is complete and an unqualified opinion has been issued is the
A. Acceptable audit risk C. Inherent risk
B. Financial risk D. Statistical risk

66. Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance
to refer to ________
A. Acceptable audit risk C. Detection risk
B. Audit report risk D. None of the above

67. Which of the following models expresses the general relationship of the auditor’s assessments of
control risk (CR) and inherent risk (IR), the detection risk associated with analytical procedures
and other relevant substantive test (DR), and overall allowable audit risk (AR) that would lead the
auditor to conclude that additional substantive test of details of an account balance is not
necessary?
A B C D
Inherent risk (IR) 100% 100% 100% 100%
Control risk (CR) 40% 40% 60% 70%
Detection risk (DR) 20% 30% 20% 10%
Allowable audit risk (AR) 8% 5.5% 5% 4.5%
68. While performing an audit, Conrad, a CPA, decides to restrict the risk of material misstatement to
3%. What must the acceptable level of detection risk be if inherent risk is 25% and control risk is
40%?
A. 0.3% C. 30.0%
B. 12.0% D. 33.3%

69. Which of the following would be considered the least conservative settings for inherent risk and
control risk?
A B C D
Inherent risk 1.0 1.0 0.0 0.5
Control risk 1.0 0.0 1.0 0.5

70. An auditor uses the assessed level of control risk to

A. Determine the acceptable level of detection risk of financial statements
B. Evaluate the effectiveness of the entity’s internal control policies and procedures
C. Identify transactions and account balances where inherent risk is at the maximum
D. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently
high

71. As the assessed level of control risk increases, the auditor may increase
A. Extent of test controls
B. Level of detection risk
C. Extent of substantive tests
D. Preliminary judgment about audit risk

72. Regardless of the assessed level of control risk, the auditor would perform some
A. Substantive test to determine the effectiveness of internal control policies
B. Substantive test to restrict detection risk for significant transaction classes
C. Analytical review procedures to verify the design of internal control procedures
D. Dual-purpose test to evaluate both the risk of monetary misstatement and preliminary
control risk

73. As the acceptable level of detection risk decreases the auditor may
A. Use larger sample size for tests of controls
B. Design more effective substantive procedures
C. Increase the level of inherent and control risks
D. Perform tests of control at year-end rather than at interim

74. As the acceptable level of detection risk decreases, an auditor may

A. Disregard the assessed level of inherent risk from consideration as a planning factor
B. Modify the planned timing of the substantive tests from interim dates to the year-end
C. Reduce substantive testing by relying on the assessments of inherent risk and control risk
D. Reduced the assessed level of control risk from the maximum level to below the maximum
75. If planned detection risk is reduced, the amount of substantive evidence the auditor accumulates
will
A. Be determined C. Increase
B. Decrease D. Remain unchanged

76. The relationship between materiality and audit risk is

A. Direct C. Inverse
B. Indirect D. Parallel

77. On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk from 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
B. Increase substantive testing
C. Increase the detection risk
D. Increase the materiality level

78. Which of the following is not a potential effect of an auditor’s decision that a lower acceptable
audit risk is appropriate?
A. Less evidence is required
B. More evidence is required
C. Special care is required in assigning experienced staff
D. Review of the audit files by personnel who were not assigned to the engagement

79. Which of the following is not a potential effect of an auditor’s decision that a lower acceptable
audit risk is appropriate?
A. Less evidence is needed
B. The auditor will apply more effective audit procedures
C. Special care is required in assigning experienced staff
D. Review of the working papers by personnel who were not assigned to the engagement

80. When the auditor issues an erroneous opinion as the result of an underlying failure to comply
with the requirements of standards on auditing, it results in
A. Audit failure C. Business failure
B. Audit risk D. All of the above

81. Which of the following statements concerning audit risk and its components is incorrect?
A. The higher the assessment of inherent and control risks, the more evidence the auditor should
obtain from the performance of substantive procedures
B. 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
 C. The assessed level of inherent risk need not to 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

Materiality

82. Which of the following statements best describes why an auditor makes a preliminary estimate
of materiality?
A. Estimating materiality early helps the auditor avoid legal liability
B. The estimate provides a basis for evaluating likely misstatements
C. An estimate is required by generally accepting auditing standards
D. The estimate helps the auditor plan the appropriate evidence to accumulate

83. Why do auditors establish a preliminary judgment about materiality?

A. To help the auditor plan the appropriate evidence to accumulate
B. So that the client would know records would be made available to the auditor
C. To determine what level of staffing (i.e., work experience) is required for the audit
D. All of the above

84. The preliminary judgment about materiality is the ________ amount by which the auditor
believes the statements could be misstated and still not affect the decisions of reasonable users
A. Maximum C. Median average
B. Mean average D. Minimum

85. The five steps in applying materiality are listed below in random order.
1. Estimate the combined misstatement
2. Estimate the total misstatement in the segment
3. Set preliminary judgment about materiality to segments
4. Allocate preliminary judgment about materiality to segments
5. Compare combined estimate with preliminary judgment about materiality
A. 1, 2, 5, 4, 3 C. 4, 3, 1, 5, 2
B. 3, 4, 2, 1, 5 D. 5, 1, 3, 2, 4

86. When compering level of materiality used for planning purposes and the level of materiality used
for evaluating evidence, one would most likely expect
A. The level of materiality to be always similar
B. The level of materiality for planning purposes to be higher
C. The level of materiality for planning purposes to be smaller
D. The level of materiality for planning purposes to be based on total assets while the level of
materiality for evaluating purposes to be based on net income
 87. When assessing materiality levels for audit purposes, the auditor should consider
A B C D
Amount involved Yes Yes No No
Nature of misstatement Yes No Yes No

88. Materiality should be considered at the

A B C D
Financial statement level Yes Yes No No
Account balance level Yes No Yes No

89. This means the amount or amounts set by the auditor at less than materiality for the FS as a whole
to reduce to an approximately low level of the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the FS as a whole
A. Allowance for sampling risk C. Planning materiality
B. Performance materiality D. Standard deviation

90. If an auditor establishes a relative low level for materiality, then the auditor will
A. Accumulate an undetermined amount of evidence
B. Accumulate less evidence than if a higher level had been set
C. Accumulate more evidence than if a higher level had been set
D. Accumulate approximately the same evidence as would be the case were a higher-level set

91. Which of the following statements is not correct?

A. Materiality is a relative rather than an absolute concept
B. Qualitative factors as well as quantitative factors affect materiality
C. Given equal amounts, frauds are usually considered more important than errors
D. Normally, the most important base used as the criterion for deciding materiality is total assets

Risk assessment procedures

92. The auditor’s risk assessment procedures

A. Are designed to test the effectiveness of the entity’s control
B. Should not consider information obtained from the auditor’s previous experience with the
entity
C. By themselves, do not provide sufficient appropriate audit evidence on which to base the
audit opinion
D. Are designed to detect material misstatements at the assertion level of classes of
transactions, account balances and disclosures

93. Risk assessment procedures would include all of the following except
A. Analytical procedures
B. Observation and inspection
C. Re-performance of client’s procedures
D. Inquiries of management and others within the entity
94. The auditor’s risk assessment procedures should always include the following, except
A. Analytical procedures
B. Observation and inspection
C. Substantive test procedures and test of controls
D. Inquiries of management and of others within the entity

95. Analytical procedures used as of risk assessment procedure are performed primarily to assist the
auditor in
A. Identifying areas that may represent specific risk
B. Obtaining knowledge about the design of internal control
C. Gathering corroborative evidence about the validity of an account balance
D. Obtaining knowledge about the operating effectiveness of the client’s internal control

96. Which of the following procedures would an auditor most likely perform in planning a financial
statement audit?
A. Performing analytical procedures to identify areas that may represent specific risk
B. Obtaining a written representation letter from the client to emphasize management’s
responsibilities
C. Reviewing investment transactions of the audit period to determine whether related parties
were created
D. Reading the minutes of stockholder and director meetings to discover whether any unusual
transactions have occurred

97. Analytical procedures used in planning an audit should focus on

A B C D
Identifying areas that may represent specific risks Yes Yes No No
Enhancing the auditor’s understanding of the Yes Yes Yes No
client’s business
Obtaining corroborative evidence Yes No No No

98. An abnormal fluctuation in gross profit that might suggest the need for external audit procedures
for sales and inventories would most likely be identified in the planning phase of the auditor by
the use of
A. A preliminary review of internal control
B. Analytical procedures
C. Specialized audit programs
D. Tests of transactions and balances

99. Which of the following is incorrect about the auditor’s risk assessment procedures?
A. The auditor should perform substantive procedures and tests of controls after the risk
assessment procedures are performed
B. Obtaining understanding of internal control is not normally sufficient to serve as testing the
operating effectiveness of the control
 C. Obtaining understanding of the entity and its environment, including its internal control, is a
continuous, dynamic process of gathering, updating and analyzing information throughout
the audit
D. In performing risk assessment procedures, the auditor may obtain audit evidence about
classes of transactions, account balances, or disclosures and related assertions, and about the
operating effectiveness of controls, even though such procedures are not specifically planned
as substantive tests of controls

Planning – Strategic Issues

Review of predecessor auditor’s working paper

100. A CPA is conducting the first examination of a client’s financial statements. The CPA hopes to
reduce the audit work by consulting with the predecessor auditor and reviewing the
predecessor’s working papers. This procedure is
A. Required if CPA is to render an unqualified opinion
B. Acceptable if the client and the predecessor auditor agree to it
C. Acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor’s
work
D. Unacceptable because the CPA should bring an independent viewpoint to a new
engagement

101. A CPA may reduce the audit work on a first-time audit by reviewing the working papers of the
predecessor auditor. The predecessor should permit the successor to review working papers
relating to matters of continuing significance such as those that relate to
A. Analysis of contingencies
B. Extent of reliance on the work of specialists
C. Fee arrangements and summaries of payments
D. Staff hours required to complete the engagement

Use of an Expert

102. A person or firm possessing special skill, knowledge and experience in a particular field other
than accounting and auditing is called a(n)
A. Consultant C. Guru
B. Expert D. Professional

103. Which of the following is not an expert upon whose work an auditor may rely?
A. Actuary C. Engineer
B. Appraiser D. Internal auditor

104. During an audit, the auditor may need the assistance of an expert in obtaining sufficient
appropriate evidence. A common example is
A. Evaluating the integrity of management
 B. Determination of the amount using actuarial computations
C. Evaluating the potential financial statement effect of an employee fraud
D. Determining the sufficiency and appropriateness of evidential matter obtained

105. Each of the following procedures requires the assistance of an expert except
A. Interpreting major contracts
B. Determining the value of works of art
C. Determining the physical condition or quantity of underground mineral
D. Determining the adequacy of disclosure in the notes to the financial statements

106. When determining the need to use the work of an expert, the auditor would consider the
following except
A. The quantity and quality of other audit evidence available
B. The materiality of the financial statement items being considered
C. The risk misstatement based on the nature and complexity of the matter being considered
D. The professional certification or licensing by, or membership in, an appropriate
professional body

107. The risk that an expert’s objectivity will be impaired increases when the expert is related in
come other manner to the entity (for example, by being financially dependent upon or having
an investment in the entity) and when the expert is
A. Employed by the auditor C. Engaged by the auditor
B. Employed by the entity D. Engaged by the entity

Internal Audit

108. An independent appraisal activity established within an entity as a service to the entity is
A. External auditing C. Internal auditing
B. Independent auditing D. Internal control

109. The overall objective of internal auditing is to

A. Ascertain that controls are cots justified
B. Attest the efficiency with which resources are employed
C. Provide assurance that financial data have been accurately recorded
D. Assist the members of the organization in the effective discharge of their responsibilities

110. The independent auditors might consider the procedures performed by the internal auditors
because:
A. There are employees whose work might be considered
B. Their degree of independence may be inferred by the nature of their work
C. There are employees whose work must be reviewed during substantive testing
D. Their work impacts upon the cost/benefit trade-off in evaluating inherent limitations
111. When obtaining an understanding and performing a preliminary assessment in the internal
audit function, the auditor should consider the internal auditors’
A B C D
Organizational status Yes Yes Yes No
Scope of functions Yes No No Yes
Technical competence and due diligence Yes Yes No No

112. When considering the objectivity of internal auditors, an independent auditor should
A. Evaluate the quality control program in effect for the internal auditor
B. Determine the organizational level to which the internal auditors report
C. Examine documentary evidence of the work performed by the internal auditors
D. Test a sample of the transactions and balances that the internal auditors examined

113. 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 exist for other employees in the organization
D. All of the above

114. To maximize independence, the internal auditors should report to the

A. Audit committee
B. Chief financial officer
C. Controller
D. Director and information systems

115. To be independent of other business functions, internal auditors should report to any but
which of the following?
A. Board of directors
B. Company president
C. Vice president of sales
D. Audit committee of the board of directors

116. The members of a client’s “audit committee” should be

A. Directors and managers
B. Members of management
C. Non-directors and non-managers
D. Directors who are not a part of company management

117. An audit committee’s responsibilities normally would not include:

A. Nominating the independent auditors
B. Discussing the audit programs of the independent auditors
C. Discussing the meaning and significance of audited financial statements
D. Discussing problems and experience with independent auditors in completing the audit
of annual financial statements
118. As generally conceived, the audit committee of a publicly held company should be made up
of
A. Members of the board of directors who are not officers or employees
B. Representatives from the client’s management, investors, suppliers, and customers
C. Representatives of the major equity interest (bonds, preferred stock, common stock)
D. The audit partner, the chief financial officer, the legal counsel, and at least one outsider

119. 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 except
A. Establishment of adequate accounting and internal control systems
B. Review of the economy, efficiency and effectiveness of operations including non-financial
controls of an entity
C. Review of compliance with laws, regulations and other external requirements and with
management polices and directives and other internal requirements
D. Examination of the financial and operating information including review of the means to
identify, measure, classify and report such information and specific inquiry into individual
items including detailed testing of transactions and recommending improvements
thereto

120. Which of the following is NOT a responsibility that should be assigned to a company’s internal
audit department?
A. Evaluating internal control
B. Balancing subsidiary ledgers
C. Investigating potential merger candidates
D. Reporting on the effectiveness of operating segments

121. Which of the following is not appropriate function of internal auditing?

A. Review of accounting and internal control
B. Review of compliance with laws and regulations
C. Examination of financial and operating information
D. Expressing an opinion about the fair presentation of the financial statements

122. 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?
A B C D
Materiality of misstatements Yes Yes No No
Evaluation of accounting estimates Yes No Yes No

123. Which of the following statements in relation to the preliminary assessment of internal
auditing is false?
A. The external auditor should obtain a sufficient understanding of internal audit activities
to assist in planning the audit and developing an effective audit approach
 B. In some cases, after having considered the activities of internal auditing, the external
auditor may decide that internal auditing will have no effect on external audit procedures
C. Effective internal auditing will often allow a modification in the nature, timing, reduction
in the extent and even eliminate in its entirely some procedures performed by the
external auditor
D. During the course of planning the audit, the external auditor should perform a preliminary
assessment of the internal audit function when it appears that internal auditing is relevant
to the external audit of the financial statements in specific audit areas

Audit approach

124. The systems approach to an audit is least likely to be appropriate for:

A. Clients in specialized industries
B. Clients that are publicly listed
C. Clients that is large in size
D. Clients with weak internal control

Errors, Fraud & Illegal Acts

125. Material misstatements may emanate from all of the following except
A. Fraud
B. Errors
C. Limitations of the audit
D. Non-compliance with laws and regulations

Management responsibility

126. The responsibility for the detection and prevention of errors, fraud and non-compliance with
laws and regulations rests with
A. Auditor
B. Audit committee
C. Internal audit department
D. Management and those charged with governance

127. The management responsibility to detect and prevent fraud and error is accomplished by
A. Having an annual audit of financial statements
B. Signing the management representation letter
C. Implementing adequate quality control system
D. Establishing a control environment and implementing adequate internal control policies
and procedures

Errors
 128. The term “error” refers to unintentional representation of financial information. Examples of
errors are when
I. Assets have been misappropriated
II. Transactions without substance have been recorded
III. Records and documents have been manipulated and falsified
IV. The effects of the transactions have been omitted from the records

A. Only statements I and III are true

B. Only statements II and IV are true
C. All of the above statements are true
D. All of the above statements are false

129. Which of the following is an example of an error?

A. Defalcation
B. Recording of transactions without commercial substance
C. Oversight that resulted in an incorrect accounting estimate
D. Suppression or omission of the effects of transactions from the records or documents

130. AN error in which an item is posted to the wrong personal account, or the incorrect calculation
of an amount constituting an original entry is a(n):
A. Counterbalancing error C. Error of omission
B. Error of commission D. Error of principle

Fraud

131. An intentional act by one of more individuals among management, employees, or third parties
which results in a misinterpretation of financial statements is referred to as
A. Error C. Illegal act
B. Fraud D. Non-compliance

132. Which of the following statements most appropriately defines fraud in a financial statement
auditing context?
A. Fraud is an intentional misstatement of the financial statements
B. Fraud is an unintentional misstatement of the financial statements
C. Fraud is either an intentional or unintentional misstatement of the financial statements
D. None of the above correctly defines fraud

133. An act of two or more employees to steal assets or misstate records is frequently referred to
as
A. A control deficiency C. Collusion
B. A material weakness D. Any of the above

134. Which of the following is a category of fraud?

A. Fraudulent financial reporting C. A and B
 B. Misappropriation of assets D. Neither A nor B

135. Which of the following statements best identifies the two types of fraud?
A. Theft of assets and employee fraud
B. Misappropriation of assets and defalcation
C. Management fraud and fraudulent financial reporting
D. Fraudulent financial reporting and misappropriation of assets

136. Which of the following is an example of fraud?

A. Misappropriation of assets or group of assets
B. Errors in the application of the accounting principles
C. Clerical errors in accounting data underlying the financial statements
D. Misinterpretation of facts that existed when financial statements were prepared

137. The best and most widely accepted model for explaining why “good people” commit fraud is
known as the:
A. Cressey Model C. Gloria Zamora Model
B. Fraud Triangle D. Trust Violator Theorem

138. Which of the following is not considered among the fraud risk factors?
A. Ineffective control environment
B. The existence and enforcement of a written code of conduct
C. The granting of significant bonuses if unrealistic profit targets are met
D. The need to meet expectation of third parties to obtain additional equity financing

139. Which of the following statements describes circumstances that underlie employee incentives
to misappropriate assets?
A. Weak internal controls encourage employees to chances
B. Dissatisfied employees may steal from an absence of entitlement
C. If management cheats customers and gets away with it, then employees can do the same
to the company
D. Each of the above describes circumstances underlying employee incentives to
misappropriate assets

140. __________ is an intentional misstatement or omission of amounts or disclosures with the

intent to deceive the readers of the financial statements
A. An error
B. Fraudulent financial reporting
C. Misappropriation of assets
D. None of the above is correct

141. Fraudulent financial reporting is often called

A. Defalcation C. Management fraud
 B. Employee fraud D. Theft of assets

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

A. Company management
B. The company’s auditors
C. Line employees of the company
D. Outside members of the company’s board of directors

143. Which of the following is a factor that relates to attitudes or rationalization to commit
fraudulent financial reporting?
A. Management’s practice of making overly aggressive forecasts
B. Significant accounting estimates involving subjective judgments
C. Excessive pressure for management to meet debt repayment requirements
D. High turnover of accounting, internal audit and information technology staff

144. Which of the following is a category of risk factors that should be considered in relation to
misstatements arising from fraudulent financial reporting?
A. Internal controls
B. Industry conditions
C. Susceptibility of assets to misappropriation
D. Assets that can be easily converted to cash

145. The risk of fraudulent financial reporting increases in the presence of

A. Improved control system
B. Substantial increases in sales
C. Frequent changes in suppliers
D. Incentive systems based on operating income

146. Which of the following is not a factor that relates to opportunities to commit fraudulent
financial reporting?
A. Ineffective board of director oversight over financial reporting
B. Management’s practice of making overly aggressive forecasts
C. Significant accounting estimates involving subjective judgments
D. High turnover of accounting, internal audit and information technology staff

147. Fraudulent financial reporting may be accomplished through the manipulation of

A. Assets C. Revenues
B. Liabilities D. All of the above

148. Which of the following is an example of fraudulent financial reporting?

A. An employee steals inventory and the “shrinkage” is recorded in cost of goods sold
B. Company management changes inventory count tags and overstates ending inventory,
while understating cost of goods sold
 C. An employee steals small tools from the company and neglects to return them; the cost
is reported as a miscellaneous operating expense
D. The treasurer diverts customer payments to his personal due, concealing his action by
deducting an expense account, thus overstating expenses

149. If there is fraud involving the collusion of several employees that includes the falsification of
documents, the chance that such a fraud would be uncovered in a normal audit is
A. 50/50 C. Very high
B. Unlikely D. Zero

150. If there is a risk of material misstatement resulting from fraud that may involve or result in
improper revenue recognition, it would be appropriate for the auditor to
A. Withdraw from the engagement
B. Express a qualified opinion or an adverse opinion
C. Confirm with customers certain relevant contract terms
D. Propose adjusting entry in order to reverse the amount of revenue

151. Judgment about the risk of material misstatements resulting from fraud may affect the audit
in the following ways except
A. The auditor may select more experienced staff auditors
B. The auditor will need to obtain more internally generated evidence
C. The auditor will need to increase the sample size for substantive tests
D. The auditor may decide to consider further management’s selection and application of
significant accounting policies, particularly those related to revenue recognition, asset
valuation or capitalizing versus expensing

152. If there is fraud involving the collusion of several employees that includes the falsification of
documents, the chance that such fraud would be uncovered in normal audit is:
A. 50/50 C. Very high
B. Unlikely D. Zero

153. _________ is fraud that involves theft of an entity’s assets

A. A “cookie jar” reserve
B. Fraudulent financial reporting
C. Misappropriation of assets
D. Each of the above is correct

154. An internal auditor would be concerned about the possibility of fraud if

A. Only one person has access to the petty cash fund
B. Cash receipts, net of the amounts used to pay petty cash-type expenditures, are
deposited in the bank daily
C. The accounts receivable subsidiary ledger and accounts payable subsidiary ledger are
maintained by the same person
 D. The monthly bank statement reconciliation is performed by the same employee who
maintains the perpetual inventory records

155. In an audit of a purchasing department, which of the following usually is considered a risk
factor?
A. Purchases are made from parties related to buyers or other company officials
B. Purchases are not rotated among suppliers included on an approved vendor list
C. Purchase specifications are developed by the department requesting the material
D. Purchases are made against blanket or open purchase orders for certain types of items

156. Which of the following is a factor that relates to incentives to misappropriate assets?
A. Significant personal financial obligations
B. Management’s practice of making overly aggressive forecasts
C. Significant accounting estimates involving subjective judgments
D. High turnover of accounting, internal audit and information technology staff

157. Which of the following is a category of risk factors that should be considered in relation to
misstatements arising from misappropriation of assets?
A. Controls
B. Industry conditions
C. Management characteristics
D. Operating characteristics

158. The auditor is most likely to presume that a high risk of defalcation exist if
A. The client does business with several related parties
B. Inadequate employee training results in lengthy EDP exception reports each month
C. The client is multinational company that does business in numerous foreign countries
D. Inadequate segregation of duties places an employee in a position to perpetrate and
conceal fraud

159. Which of the following is not a factor that relates to opportunities to misappropriate assets?
A. Inadequate internal controls over assets
B. Presence of large amounts of cash on hand
C. Adverse relationships between management and employees
D. Inappropriate segregation of duties or independent checks on performance

160. The process which postpones entries for the collection of receivables to conceal an existing
cash shortage is referred to as
A. Computer fraud C. Kiting
B. Cooking the books D. Lapping

161. This is the kind of fraud committed by making entries of fictitious payments or failure to enter
receipts
A. Falsification of accounts C. Misappropriation of cash
 B. Lapping D. Misappropriation of goods

162. Cash receipts from sale on account have been misappropriated. Which of the following acts
would conceal this defalcation and be least likely to be detected by an auditor?
A. Understating the sales journal
B. Understating the cash receipts journal
C. Overstating the accounts receivable control account
D. Overstating the accounts receivable subsidiary ledger

163. Which of the following is a false statement concerning fraud?

A. Fraud involves actions of management but excludes the actions of employees or third
parties
B. An audit rarely involves the authentication of documentation; thus, fraud may go
undetected by the auditor
C. Two types of misstatements relevant to the auditor include material misstatements
arising from misappropriation of assets
D. Fraud generally involves incentives or pressure to commit fraud, a perceived opportunity
to do so, and some rationalization of the act

Errors & fraud

164. The primary factor that distinguishes errors from fraud is whether the
A. Misstatement is concealed
B. Underlying cause of misstatement is intentional or unintentional
C. Misstatement is perpetrated by an employee or by a member of management
D. Underlying cause of misstatement relates to misapplication of accounting principles or to
clerical processing

165. Which of the following statement is most correct regarding errors and fraud?
A. Errors are always fraud and frauds are always errors
B. An error is unintentional, whereas fraud is intentional
C. Frauds occur more often than errors in financial statements
D. Auditors have more responsibility for finding fraud than errors

Illegal Acts

166. When management refuses to disclose illegal activities, which were identified by the
independent auditor, the independent auditor may be charged with violating the Code of
Professional Ethic for
A. Issuing a disclaimer of opinion
B. Withdrawing from the engagement
C. Reporting these activities to the audit committee
D. Failure to uncover the illegal activities during prior audits
Auditor’s responsibility

167. When is the auditor responsible for detecting fraud?

A. When the fraud did not result from collusion
B. When third parties are likely to rely on the client’s financial statements
C. When the client’s system of internal control is judged by the auditor to inadequate
D. When the application of generally accepted auditing standards would have uncovered the
fraud

168. The auditor’s best defense when material misstatements in the financial statements are not
uncovered in the audit is that
A. Client is guilty of contributory negligence
B. The financial statements are client’s responsibility
C. The audit was conducted in accordance with PSA
D. The audit was conducted in accordance with generally accepted accounting principles

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

170. When comparing misstatements with a measurement base, the auditor must consider the
pervasiveness of the misstatement. An example of a pervasive misstatement would be
A. An understatement of inventory, caused by miscounting
B. A misclassification of notes payable as a long-term liability when it should be current
C. An understatement of retained earnings, caused by a miscalculation of dividends payable
D. A misclassification of salary expense as a selling expense when it should be allocated
equally to both selling and administrative expense

171. Which of the following statements is true?

A. Usually, none of the above statements is true
B. It is usually easier for the auditor to uncover errors than fraud
C. It is usually easier for the auditor to uncover fraud than errors
D. It is usually equally difficult for the auditor to uncover errors or fraud

172. In distinguishing between the detection of a material management fraud and an equally
material error. Audits
A. Provide no assurance of detecting either
B. Should provide complete assurance of detection
C. Cannot be expected to provide the same degree of assurance
D. Should be expected to provide the same degree of assurance
173. The likelihood of detecting error is ordinarily higher than that of detecting fraud because
A. Fraud is usually accompanied by acts designed to conceal its existence
B. Fraud is usually accompanied by a non-compliance with laws and regulations
C. Errors cause the financial statements to contain material misstatements while fraud does
not
D. The auditor designs the audit procedures to detect material errors, but no procedures are
designed to detect material fraud

174. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover
the fraud is greater for
A. Employee fraud because of the higher crime rate among blue collar workers
B. Management fraud because managers are inherently smarter than employees
C. Employee fraud because of the larger number of employees in the organization
D. Management fraud because of management’s ability to override existing internal controls

175. Should the auditor uncover circumstances during the audit that may cause suspicions of
management fraud the auditor must
A. Issue a disclaimer
B. Issue an adverse opinion
C. Withdraw from engagement
D. Evaluate their implications and consider the need to modify audit procedures

176. Which of the following does not properly describe an auditor’s specific response to the
assessment of risk of material misstatement resulting from fraud?
A. Request that inventories be counted before year-end
B. Perform substantive analytical procedures at a detailed level
C. Visit locations or perform certain tests on a surprise or unannounced basis
D. Perform detailed review of the entity’s quarter end or year-end adjusting entries

177. What is the independent auditor’s responsibility prior to completion of field work when he
believes that a material fraud may have occurred?
A. Notify the appropriate law enforcement authority
B. Investigate the person involved, the nature of the fraud, and the amounts involved
C. Reach an understanding with the appropriate client representatives as to the desired
nature and extent of subsequent audit work
D. Continue to perform normal audit procedures and write the audit report in such a way to
disclose adequately the suspicions of material fraud

178. If the auditor is unable to determine whether fraud or error has occurred because of
limitations imposed by the circumstances, the auditor would most likely issue a report that
contains
A. A qualified opinion
B. An adverse opinion
C. An unqualified opinion
 D. An unqualified opinion with an emphasis of a matter paragraph

179. Which of the following statements is incorrect?

A. The auditor is not and cannot be held responsible for the detection of fraud or error
B. The risk of not detecting material fraud is higher than the risk of not detecting a material
misstatement arising from error
C. The responsibility for the prevention and detection of fraud and error rests with
management and those charged with governance
D. In planning an audit, the auditor should assess the risk that fraud or error may cause the
financial statements to contain material misstatements

180. Auditing standards require that auditors be aware of relevant factors relating to fraud. Which
of the following statements about fraud is false?
A. Fraud involves actions of management but excludes the actions of employees or third
parties
B. An audit rarely involves the authentication of documentation thus; fraud may go
undetected by the auditor
C. Fraud frequently involves pressure or an incentive to commit fraud and a perceived
opportunity to do so
D. Two types of fraud relevant to the auditor include material misstatements arising from
fraudulent financial reporting and material misstatements arising from misappropriation
of assets

Comprehensive

181. Which of the following statements about fraud or error is incorrect?

A. The likelihood of detecting fraud is ordinarily higher than that of detecting error
B. The auditor is not and cannot be held responsible for the prevention of fraud and error
C. The responsibility for the prevention and detection of fraud and error rests with
management
D. The auditor should plan and perform the audit with an attitude of professional skepticism,
recognizing that conditions or events may be found that fraud or error may exist

182. Which of the following statements is not correct?

A. A misclassification in the balance sheet will have no effect on operating income
B. Either an overstatement of an asset account or an overstatement of a liability account
would have the same effect on the income statement
C. Either an overstatement of an asset account or an understatement of a liability account
would have the same effect on the income statement
D. Either an understatement of an asset account or an overstatement of a liability account
would have the same effect on the income statement

Internal Control
Basic Concepts

183. The fundamental purpose of an internal control structure is to

A. Safeguard the resources of the organization
B. Encourage compliance with organization objectives
C. Ensure the accuracy, reliability and timeliness of information
D. Provide reasonable assurance that the objectives of the organization are achieved

184. Which of the following is not one of the three primary objectives of effective internal control?
A. Reliability of financial reporting
B. Compliance with laws and regulations
C. Efficiency and effectiveness of operations
D. Each of the above is a primary objective of effective internal control

185. Which of the following would be least likely to be considered an objective of the internal
control structure?
A. Safeguarding assets
B. Detecting management fraud
C. Encouraging adherence to managerial policies
D. Checking the accuracy and reliability of accounting data

186. Which of the following parties is responsible for establishing an entity’s internal controls?
A. Auditors
B. Management
C. Management and auditors
D. Committee of Sponsoring Organizations

187. The primary responsibility for establishing and maintain an internal control structure rests
with
A. The internal auditors
B. The external auditors
C. The controller or the treasurer
D. Management and those charged with governance

188. In order to ensure unbiased information, record-keeping is typically included in a separate

department under the:
A. Controller C. Treasurer
B. Internal auditor D. VP-operations

189. Effective internal control requires organizational independence of departments.

Organizational independence would be impaired in which of the following situations?
A. The cashier reports to the treasurer
B. The controller reports to the vice president for production
C. The payroll accounting department reports to the chief accountant
 D. The internal auditors report to the audit committee of the board of directors

190. Which of the following best describes the inherent limitations that should be recognized by
an auditor when considering the potential effectiveness of internal control?
A. The benefits expected to be derived from effective internal accounting control usually do
not exceed the cost of such control
B. The competence and integrity of client personnel provides an environment conclusive to
accounting control and provides assurance that effective control will be achieved
C. Procedures designed to assure the execution and recording of transactions in accordance
with proper authorization are effective against irregularities perpetrated by management
D. None of the above

191. When considering the effectiveness of a system of internal accounting control, the auditor
should recognize that inherent limitation does exist. Which of the following is an example of
an inherent limitation in a system of internal accounting control?
A. The effectiveness of procedures depends on the segregation of employee duties
B. In the performance of most control procedures, there are possibilities of errors arising
from mistakes in judgment
C. Procedures for handling large numbers of transactions are processed by electronic data
processing equipment
D. Procedures are designed to assure the execution and recording of transactions in
accordance with management’s authorization

192. Inherent limitations in an internal control structure must be considered in evaluating its
effectiveness in preventing and detecting errors and irregularities. Inherent limitations do not
include
A. Collusions among employees
B. Incompatible functions performed by the same person
C. Management override of certain policies or procedures
D. Misunderstanding of instructions, mistakes of judgment, personal carelessness,
distraction or fatigue

193. Internal controls are not designed to provide reasonable assurance that
A. All frauds will be eliminated
B. Transactions are executed in accordance with management’s authorization
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

194. Which of the following internal control objectives would be most relevant to the audit?
A. Administrative control objective
B. Compliance objective
C. Financial reporting objective
D. Operational objective
195. The use of pre-numbered invoices, then accounting for their numeric sequence, meets
primarily the:
A. Completeness assertion
B. Existence or occurrence assertion
C. Rights and obligations assertion
D. Valuation or allocation assertion

196. Internal controls can never be regarded as completely effective. Even if company personnel
could design an ideal system, its effectiveness depends on the
A. Adequacy of the computer systems
B. Proper implementation by management
C. Ability of the internal audit staff to maintain it
D. Competency and dependability of the people using it

197. It is important for the CPA to consider the competence of the audit client’s employees
because their competence bears directly and importantly upon the
A. Timing of the tests to be performed
B. Achievement of the objectives of internal control
C. Comparison of recorded accountability with assets
D. Cost / benefit relationship of the system of internal control

198. Competence of the personnel is necessary to proper recording of transactions and supports
financial statements that are fairly presented. In reviewing the organization for necessary
competence, which of the following job types would be of least interest to the auditor?
A. Chief accountant
B. Corporate controller
C. Vice-president for marketing
D. Manager of electronic data processing

199. Authorizations can be either general or specific. Which of the following is not an example of
a general authorization?
A. A sales price list for merchandise
B. Credit limits for various classes of customers
C. A sales manager’s authorization for a sales return
D. Automatic recorder points for raw materials inventory

200. Internal control is a function of management, and effective control is based upon the concept
of change and discharge of responsibility or duty. Which of the following is one of the
overriding principles of internal control?
A. Responsibility for the performance of each duty must be fixed
B. Responsibility for accounting and financial duties should be assigned to one responsible
officer
 C. Responsibility for accounting duties must be borne by the audit committee of the
company
D. Responsibility for accounting activities and duties must be assigned only to employees
who are bonded

201. Proper segregation of functional responsibilities calls for separation of the functions of
A. Custody, execution and reporting
B. Authorization, recording and custody
C. Authorization, payment and recording
D. Authorization, execution and payment

202. Proper segregation of functional responsibilities in an effective structure of internal control

calls for separation of the functions of
A. Authorization, execution and payment
B. Authorization, payment and recording
C. Authorization, recording and custody
D. Custody, execution and reporting

203. Which of the following activities would be an example of Physical Control?

A. Blank stock of all purchase orders and sales invoices are pre-numbered
B. Access to computer facilities and records is limited to authorized personnel
C. Control and subsidiary accounts are reconciled on a regularly scheduled basis
D. Training programs are conducted to develop competence of newly hired personnel

204. The use of fidelity bonds protects a company from embezzlement losses and also:
A. Reduces the company’s need to obtain expensive business interruption insurance
B. Allows the company to substitute the fidelity bonds for various parts of internal control
C. Minimize the possibility of employing persons with dubious records in position of trust
D. Protects employees who made unintentional errors from possible monetary damages
resulting from such errors

205. The use of pre-numbered documents is meant to prevent:

A. The failure to bill or record sales
B. Duplicate billings and recording of sales
C. All of the answers
D. None of the answers

206. The frequency of the comparison of recorded accountability with assets (for the purpose of
safeguarding assets) should be determined by:
A. The auditor in consultation with client management
B. The amount of assets without reference to the cost of comparison
C. The nature and amount of the asset and cost of making the comparison
D. The cost of the comparison and whether the susceptibility to loss results from
unintentional errors or intentional irregularities and/or defalcations
 207. Effective internal control in a small company that has an insufficient number of employees to
permit proper division of responsibilities can best be enhanced by
A. Engaging a CPA to perform monthly “write-up” work
B. Employment of temporary personnel to aid in the separation of duties
C. Delegation of full, clear-cut responsibility to each employee for the functions assigned to
each
D. Direct participation by the owner of the business in the record-keeping activities of the
business

208. Internal control in small businesses is less effective than that of large entities. This weakness
can be compensated by
A. Creating a separate internal audit department
B. Having an annual audit of financial statements
C. Maintaining an adequate segregation of duties
D. Owner’s participation in the management and operations of the business

209. Which of the following statements is true?

A. Incompatible functions are those that place any person in a position to perpetuate errors
or irregularities
B. Accounting for the sequence of pre-numbered documents is a control procedure
intended to achieve specific control objectives related to validity
C. A chart of accounts is generally prepared in detail to enable the controller to pinpoint
budget variance and trace it to a specific department or area of responsibility
D. If comparison reveals that the assets do not agree with the recorded accountability, it
provided evidence of unrecorded or improperly recorded transactions

210. Which of the following is not a valid concept of internal control?

A. Accounting control procedures may appropriately be applied on a test basis in some
circumstances
B. When one person is responsible for all phases of a transaction, there should be a clear
designation of that person’s responsibility
C. Procedures designed to detect errors and irregularities should be performed by persons
other than those in a position to perpetuate irregularities
D. The recorded accountability for assets should be compared with the existing assets at
reasonable intervals and appropriate action should be taken if there are differences

COSO Framework & SOX

211. Which of the following best describes the interrelated components of internal control?
A. Organizational structure, management, philosophy and planning
B. Internal audit and management’s philosophy and operating style
C. Risk assessment, backup facilities, responsibility accounting and natural laws
 D. Control environment, risk assessment, control activities, information and communication
systems and monitoring

212. The essence of an effective controlled organization lies in the

A. Attitude of its employees
B. Attitude of its management
C. Effectiveness of its internal control
D. Effectiveness of its independent auditor

213. The ________ consists of the actions, policies and procedures that reflect the overall attitudes
of top management
A. Control activities C. Management philosophy
B. Control environment D. Monitoring function

214. The overall attitude and awareness of an entity’s board of directors concerning the
importance of the internal control structure usually is reflected in its
A. Computer-based controls
B. Control environment
C. Safeguard over access to assets
D. System of segregation of duties

215. Which of the following are considered control environment factors?

A B C D
Detection risk Yes Yes No No
Human resources policies and practices Yes No Yes No

216. Which of the following factors are included in an entity’s control environment?

A B C D
Audit Committee Yes Yes Yes No
Assignment of Responsibility Yes Yes No Yes
Management Operating Style Yes No Yes Yes

217. When obtaining an understanding of an entity’s control environment, an auditor should

concentrate on the substance of management’s policies and procedures rather than on their
form because
A. Management may establish appropriate policies and procedures but not act on them
B. The auditor may believe that the policies and procedures are inappropriate for that
particular entity
C. The board of directors may not be aware of management’s attitude toward the control
environment
D. The policies and procedures may be so ineffective that the auditor may assess control risk
at the maximum level
218. In evaluating the design of the entity’s internal control environment, the auditor considers
the following elements and how they have been incorporated into the entity’s processes.
Such elements would include all of the following except
A. Organization structure
B. Integrity and ethical values
C. Commitment to competence
D. Information and communications systems

219. Which of the following statements best describes the entity’s risk assessment process?
A. Entity’s assessment of audit risks affecting the financial statements
B. Entity’s process of evaluating the risk of misstatements due to fraud
C. Entity’s assessment of risks that internal control may fail to detect misstatements
affecting the financial statements
D. Entity’s process of identifying business risks relevant to financial reporting objectives and
deciding about action to address those risks

220. The policies and procedures that help ensure that management directives are carried out are
referred to as the:
A. Control activities C. Information system
B. Control environment D. Monitoring of controls

221. “Control activities” include procedures that pertain to physical controls over access to and use
of assets and records. A departure from the purpose of such procedure is that:
A. Access and safe-deposit box require two officers
B. Only salesperson and sales supervisors use sales department vehicles
C. The mail clerk compiles a list of the checks received in the incoming mail
D. Only storeroom personnel and line supervisors have access to the raw materials
storeroom

222. Which of the following is not an example of specific control activities?

A. Performance reviews
B. Segregation of duties
C. Authorization of transactions
D. Participation of those charged with governance

223. Control procedures do not encompass:

A. An internal audit function
B. Design and use of documents
C. Proper safeguards over access to assets
D. Comparison of assets with recorded accountability

224. The process of evaluating the quality of internal control overtime is known as
A. Monitoring C. Operational audit
B. Performance reviews D. Risk assessment
 225. Which of the following is not a component of an entity’s internal control?
A. Control procedures C. The accounting system
B. Control risk D. The control environment

226. Which of the following is not one of the subcomponents of the control environment?
A. Organizational structure
B. Commitment to competence
C. Adequate separation of duties
D. Management’s philosophy and operating cycle

Study & Evaluation of Internal Control

227. Which of the following comes CLOSEST to outlining the auditor’s responsibility for internal
control on all financial statements audits?
A. When tests of controls have been performed, control risk must be assessed at a level less
than the maximum
B. The auditor must obtain an understanding of each of the five internal control elements
sufficient to plan the audit
C. An understanding of the control environment is necessary, but not of the accounting
system or control procedures unless control risk is to be assessed at a level less than the
maximum
D. An understanding of the control environment and the accounting system is necessary; an
understanding of the control procedures is necessary for areas in which the auditor is
performing test of controls

228. One of the auditor’s major concerns is to ascertain whether the internal control structure is
designed to provide reasonable assurance that
A. The chief accounting officer reviews all accounting transactions
B. Profit margins are maximized, and operational efficiency is optimized
C. Corporate morale problems are addressed immediately and effectively
D. Transactions are executed in accordance with management’s general specific
authorization

229. An auditor’s consideration about internal control is whether

A. The control prevents collusion among employees
B. A specific control contributes to efficiency and effectiveness of entity’s operation
C. The control reasonably ensures that the entity complies with government laws and
regulations
D. A specific control prevents or detect and corrects material misstatements in classes of
transactions, account balances or disclosures, and their related assertions

230. Which one of the management’s concerns with respect to implementing internal controls is
the auditor primarily concerned?
 A. Efficiency of operations
B. Effectiveness of operations
C. Reliability of financial reporting
D. Compliance with applicable laws and regulations

231. One of the auditor’s major concern’s is to ascertain whether internal control is designed to
provide reasonable assurance that
A. Financial statements are fairly presented
B. The chief accounting officer reviews all accounting transactions
C. Profit margins are maximized, and operational efficiency is optimized
D. Corporate morale problems are addressed immediately and effectively

232. When obtaining an understanding of controls that relevant to the audit, the auditor is
required to
A. Evaluate the design of those controls
B. Determine whether those controls have been implemented
C. Evaluate the design of those controls and determine whether they have been
implemented
D. Evaluate the design of those control and determine whether they have been
implemented by performing tests of controls

233. The auditor should obtain sufficient understanding of the entity and its environment,
including its internal control in order to
A B C D
Identify and assess the risk of material misstatement Yes Yes No No
Design appropriate audit procedures Yes No Yes No

234. When obtaining understanding of the entity’s internal control, the auditor should obtain
knowledge about the system’s:
A B C D
Design Yes Yes No No
Implementation Yes Yes No No
Operating effectiveness Yes No Yes No

235. Which of the following statements is correct when the auditor obtains understanding of the
entity’s environment and its internal control?
A. The extent of understanding about the entity’s and its environment and internal control
should be determined by the client’s management
B. The depth of the overall understanding that is required by the auditor in performing the
audit is at least equal to that possessed by the client’s management
C. The auditor’s understanding must be sufficient enough to identify and assess the risk of
material misstatements and to design and perform further audit procedures
 D. In a continuing audit engagement, the auditor need not obtain understanding of the
entity and its environment and internal control if sufficient understanding has been
obtained in the prior year

236. Which of the following statements is incorrect when obtaining understanding of the entity’s
internal control?
A. Obtaining understanding of internal control should be performed in every financial
statement audit
B. Obtaining an understanding of an entity’s internal control normally includes inquiry,
inspection, observation and re-performance
C. Obtaining an understanding of an entity’s internal control is normally not sufficient to
serve as testing the operating effectiveness of controls
D. Obtaining an understanding of an entity’s internal control involves obtaining
understanding of the design and determining whether it has been implemented

237. Which of the following techniques is not useful for obtaining an understanding of internal
controls?
A. Read industry trade magazines
B. Examine documents and records
C. Make inquiries of the client’s personnel
D. Observe client activities and operations

238. The independent auditor should acquire an understanding of the internal audit function as it
relates to the independent auditor’s study and evaluation of internal accounting control
because
A. The understanding of the internal audit function is an important substantive test to be
performed by the independent auditor
B. The work performed by internal auditors may be a factor in determining the nature,
timing and extent of the independent auditor’s procedures
C. The audit programs, working papers and reports of internal auditors can often be used as
substitute for the work of the independent auditor’s staff
D. The procedures performed by the internal audit staff may eliminate the independent
auditor’s need for an extensive study and evaluation of internal control

239. Which of the following is an advantage of describing internal control through the use of a
standardized questionnaire?
A. Questionnaires highlight weaknesses in the system
B. Questionnaires are more flexible than other methods of describing internal control
C. Questionnaires provide a clearer and more specific portrayal of a client’s system than
other methods of describing internal control
D. Questionnaires usually identify situations in which internal control weaknesses are
compensated for by other strengths in the system
240. During which part of an audit examination is the preparation of the flowchart most
appropriate?
A. When performing tests of controls
B. When reviewing the system of internal control
C. When performing preliminary analytical procedures
D. When evaluating the system of administrative control

241. When the auditor attempts to understand the operation of the accounting system by tracing
a few transactions through the accounting system, this is referred to as
A. A walk-through C. Tracing
B. Tests of controls D. Vouching

242. An objective of a walk-through is to:

A. Replace tests of controls
B. Verify that the structure has been placed in operation
C. Evaluate the major strengths and weaknesses in the client’s structure
D. Identify weaknesses to be communicated to management in the management letter

243. Obtaining knowledge about whether the control is implemented can best be obtained by
A. Performing tests of control
B. Inquiry of client’s personnel
C. Reading procedures manual
D. Tracing transactions through the information system relevant to financial reporting

244. Which of the following statements is not correct?

A. It would be unusual to use both a narrative and a flowchart to describe the same system
B. The advantage o the narrative description is the ease of describing the details of the
internal control structure
C. The use of both questionnaire and flowcharts on the same engagement is highly desirable
for understanding the client’s system
D. When reliable and understandable narratives, flowcharts and questionnaires are
available from the client, it is desirable to use them rather than have the auditor prepare
his/her own documents

245. Evaluating the design of the entity’s internal control would involve
A. Determining whether the control is operating effectively
B. Determining whether the control exists and the entity using it
C. Determining the consistency of application of internal control procedures
D. Considering whether the control, individually or in combination with other controls, is
capable of effectively preventing, or detecting and correcting material misstatements

246. A deficiency in internal control exist when:

A. A control necessary to prevent, or detect and correct, misstatements in the financial
statements on a timely basis is not missing
 B. A control is designed, implemented or operated in such a way that it is unable to prevent,
detect and correct misstatements in the financial statements on a timely basis
C. There is a deficiency or combination of deficiencies in internal control that, in the
auditor’s professional judgement, is of sufficient importance to merit the attention of
those charged with governance
D. All of these choices describe a deficiency in the internal control

247. If the internal control structure is determined to be ineffective during obtaining an

understanding phase, the tests of controls
A. Will not be performed
B. Will be performed at an interim date
C. Will be performed at the balance sheet date
D. Will be performed at the beginning of client’s fiscal period

248. In the consideration of internal control, effectiveness of the design of controls is tested by:
A. Decision tables C. Substantive tests
B. Flowcharts D. Tests of controls

249. The purpose of tests of controls is to provide reasonable assurance that the
A. Entity has complied with requirements of quality control
B. Accounting control procedures are functioning as intended
C. Accounting treatment of transactions and balances is valid and proper
D. Entity has complied with disclosure requirements of generally accepted accounting
principles

250. Which one of these is not a type of evidence that would be used for both obtaining an
understanding of the control structure and testing the control?
A. Inquiries C. Observation
B. Inspection D. Re-performance

251. Tests of controls are directed toward the control’s

A. Cost benefit ratio C. Efficiency
B. Effectiveness D. Efficiency and effectiveness

252. Tests of controls are directed towards control

A B C D
Effectiveness Yes Yes No No
Efficiency Yes No Yes No

253. Tests of controls address each of the following questions except

A. How were the procedures performed?
B. Why were the procedures performed?
C. By who were the procedures performed?
D. Were the necessary procedures performed?
254. Tests of controls are designed to obtain evidence to support the auditor’s assessment of
control risk
A. At a high-level C. At the maximum level
B. At less than high level D. At zero level

255. When controls are deemed effective and assessed control risk is low, there will be ________
emphasis placed on tests of controls
A. Heavy C. No
B. Moderate D. Relatively little

256. Extended performance of tests of controls is most likely to occur when

A. It is a first-year audit
B. The auditor is doing a “fraud audit”
C. Controls are effective and assessed control risk is low
D. Controls are ineffective and assessed control risk is high

257. Auditor’s tests of operating effectiveness of internal controls might include which of the
following types of procedures?
A. Inquiries of personnel
B. Inspection of relevant documentation
C. Re-performance of the application of controls
D. All of the above

258. A procedure that would most likely be used by an auditor in performing tests of control
procedures that involved segregation of functions and that leave no transaction trail is
A. Inspection C. Reconciliation
B. Observation D. Re-performance

259. Which of the following audit tests would be regarded as a test of controls?
A. Comparison of the inventory pricing to vendor’s invoices
B. Tests of the additions to property, plant and equipment by physical inspections
C. Tests of the signatures on canceled checks to board of directors’ authorizations
D. Review of the specific items making up the balance in a given general ledger account

260. Which of the following audit tests would be regarded as a test of a control?
A. Tests of the inventory pricing to vendor’s invoices
B. Tests of the signatures on canceled checks to management’s authorizations
C. Tests of the additions to property, plant and equipment by physical inspections
D. Tests of the specific items making up the balance in a given general ledger account

261. Test of controls, for efficiency, are frequently done at the same time as:
A. Analytical procedures
B. Compliance tests
C. Substantive tests of balances
 D. Substantive tests of transactions

262. Which of the following tests is not appropriate for purposes of testing the effectiveness of
controls?
A. Re-perform client procedures
B. Make inquiries of client personnel
C. Observe control-related activities
D. Evaluate prior experience with the client

263. After performing a study and evaluation of the client’s system of internal control, an auditor
has concluded that the controls are well designed and functioning as anticipated. Under these
circumstances the auditor would most likely
A. Cease to perform further substantive tests
B. Not increase the extent of predetermined substantive tests
C. Increase the extent of planned analytical review procedures
D. Perform all tests of controls to the extend outlined in the audit program

264. After the auditor has identified the key internal controls and deficiencies and assessed control
risk, it is appropriate to decide whether
A. Tests of controls will be reduced sufficiently to justify cost of performing substantive tests
B. Substantive tests will be reduced sufficiently to justify the cost of performing tests of
controls
C. Substantive tests will be increased sufficiently to justify the cost of performing tests of
controls
D. Tests of controls will be increased sufficiently to justify the cost of performing substantive
tests

265. At interim dates, an auditor evaluates a client’s internal control procedures and finds them to
be effective. The auditor then performs a substantial part of the audit engagement on a
continuous basis throughout the year. At a minimum, the auditor’s year-end audit procedures
must include
A. Confirmation of year-end accounts that were examined at interim dates
B. Determination that the client’s internal control procedures are still effective at year-end
C. Tests of compliance with internal control in the same manner as those tests made at
interim dates
D. Comparison of the responses to the auditor’s internal control questionnaire with a
detailed flowchart at year-end

266. Which of the following statements regarding tests of controls is correct?

A. Tests of controls must be performed on each audit
B. Tests of controls must be performed if the auditor intends to rely on the client’s control
C. Control test deviations are significant only if they occur in significant patterns never
before seen by the auditor
D. All of the above are correct
Transaction Cycles

267. Transaction cycles begin and end:

A. At the balance sheet date
B. At January 1 and December 31
C. At the beginning and end of the fiscal period
D. At the origin and final disposition of the company

268. A company holds as a short-term investment (i.e. trading security). Responsibility for custody
of these bonds and submission of coupon for periodic interest collections probably should be
delegated to the:
A. Cashier C. Internal auditor
B. Chief accountant D. Treasurer

269. A company has additional funds to invest. The Board of Directors decided to purchase
investment securities and assigned the future purchase and sales decisions to a responsible
financial executive. The best person(s) to make periodic reviews of the investment activity
should be
A. BOD investment committee C. The corporate controller
B. The chief operating officer D. The treasurer

270. Which of the following questions would an auditor most likely include on an internal control
questionnaire for notes payable?
A. Are direct borrowings on notes payable authorized by the board of directors?
B. Are the proceeds from notes payable used for the purchase of noncurrent assets?
C. Are two or more unauthorized signatures required on checks that repay notes payable?
D. Are the assets that collateralized note payable critically needed for the entity’s continued
existence?

271. Notes payable which have been repaid in full should be:
A. Cancelled and destroyed
B. Cancelled and returned to the creditor
C. Destroyed so that they will not be paid again inadvertently
D. Cancelled and retained by an authorized company official

272. With respect to sales, prenumbered documents are intended to

A. Prevent the failure to bill or record sales
B. Prevent duplicate billings or recordings of sales
C. A and B
D. Neither A nor B

273. A document for recording the description, quantity and related information for goods ordered
by a customer is the
 A. Customer order C. Sales order
B. Remittance advice D. Shipping document

274. The document used to indicate to the customer the amount of a sale and due date of the
payment is the
A. Bill of lading C. Sales order
B. Sales invoice D. Shipping document

275. The document used as the basis for recording sales transactions and updating the AR master
file is the
A. Bill of lading C. Sales journal
B. Sales invoice D. Sales order

276. The daily entries in the sales journal supported by the

A. Credit Memos C. Sales invoice
B. Remittance advice D. Shipping documents

277. The report which typically includes information analyzed by key components as sales person,
product and territory is the:
A. Accounts receivable master file C. Remittance advice
B. Monthly statement D. Summary sales report

278. Which of the following forms may serve as the shipping document?
A. Bill of lading C. Sales invoice
B. Material requisition D. Sales order

279. A document prepared to initiate shipment of the goods sold is the:

A. Bill of lading C. Sales invoice
B. Customer order D. Sales order

280. The document which supports reductions in accounts receivable for sales returns and
allowances is the
A. Credit memo C. Remittance advice
B. Monthly investment D. Sales invoice

281. The document which accompanies the customer’s payment is the

A. Credit memo C. Remittance advice
B. Monthly statement D. Sales invoice

282. A file for recording individual sales, cash receipts and sales returns and allowances for each
customer is the:
A. Sales journal
B. General ledger
C. Cash receipts journal
 D. Accounts receivable subsidiary ledger

283. A document sent to each customer showing their beginning accounts receivable balance and
the amount and date of each sale, cash payment received, credit memo issued, and the
ending accounts receivable balance is the:
A. Accounts receivable subsidiary ledger
B. Monthly statement
C. Remittance advice
D. Sales invoice

284. In the revenue and collection cycle, of the order of activities listed, which is in the best order
of typical sequence of activities?
A. Credit granting, billing customers, delivering goods, cash receipts
B. Customer ordering, delivering goods, billing customer, cash receipts
C. Delivering goods, billing customers, credit granting, collection activity
D. Customer ordering, delivering goods, credit granting, collection activity

285. Which of the following is not one of the classes of transactions included in the sales and
collection cycle?
A. Bad debt expense
B. Sales returns and allowances
C. Charge-off of uncollectible accounts
D. Depreciation expense-store equipment

286. What event initiates a transaction in the sales and collection cycle?
A. Customer request for goods
B. Delivery of product to a customer
C. Identification of a new customer
D. Receipt of cash

287. The customer’s request for merchandise, the customer order, would be in form of:
A. An oral request
B. A written request on pre-printed form
C. A written request on customer’s letterhead
D. Any of these formats

288. Sales order and invoice blanks should be controlled in the:

A. Sales manager in the sales department
B. Credit manager in the credit department
C. Billing clerk in the accounting department
D. Sales order section of the sales department

289. What critical event must take place before goods can be shipped?
 A. Credit approval
B. Receipt of cash
C. Determination of correct delivery address
D. Receipt of purchase order from customer

290. Before goods are shipped on account, a properly authorized person must
A. Approve credit
B. Approve the journal entry
C. Prepare the sales invoice
D. Verify that the unit price is accurate

291. In a credit merchandising organization, the best place to vest credit approval is in:
A. The billing department
B. The credit department
C. The sales department
D. The cashier area where receipts will eventually be sent

292. For most firms, the function of indicating credit approval is recorded on the:
A. Customer order C. Sales invoice
B. Remittance advice D. Sales order

293. To achieve good internal control, which department should perform the activities of matching
shipping documents with sales order and preparing daily sales summaries?
A. Billing C. Sales order
B. Credit D. Shipping

294. Most companies recognized sales when

A. The merchandise is shipped
B. Cash is received on account
C. A customer order is received
D. The merchandise is received by the customer

295. It is important the sales be billed and recorded in the journal as soon as possible after
A. The order is received
B. Shipment takes place
C. The order is received, and credit is approved
D. Credit is approved and it is verified that there is enough inventory to fill the order

296. The document which supports reductions in accounts receivable is the:

A. Credit memo C. Remittance advice
B. Monthly statement D. Sales invoice

297. Credit memos are normally issued for what purposes?

A. To facilitate record keeping
 B. To reduce customer frustration
C. To maintain control of returned merchandise
D. A and C

298. When posting to the sales journal, details of a journal are posted to X and journal totals are
posted to Y. What is X, what is Y?
X Y
A. Sales account General ledger
B. AR master file General ledger
C. Sales account AR Subsidiary ledger
D. AR GL account Sales GL account

299. When a customer fails to include a remittance advice with a payment, it is a common practice
for the person opening the mail to prepare one. Consequently, mail should be opened by
which of the following four company employees?
A. Accounts receivable clerk C. Receptionist
B. Credit management D. Sales manager

300. When accounts receivable is considered uncollectible, the person who generally authorizes
the write-off is the:
A. Accountant C. Sales manager
B. Credit manager D. Treasurer

301. Which one of the following is not an auditor’s concern about a key authorization point in the
revenue/receipts cycle?
A. Prices must be authorized
B. Goods must be shipped after authorization
C. Credit must be authorized before the sale
D. A receiving room must have authorization before releasing items to inventory control

302. Which of the following controls most likely would be effective in offsetting the tendency of
sales personnel to maximize sales volume at the expense of high bad debt write-offs?
A. Employees involved in the credit granting function are separated from sales function
B. Employees responsible for authorizing sales and bad debt write-offs are denied access to
cash
C. Shipping documents and sales invoices are matched by an employee who does not have
authority to write-off bad debts
D. Subsidiary accounts receivable records are reconciled to the control account by an
employee independent of the authorization of credit

303. Which of the following would the auditor’s concern when examining the billing function of
the client?
A. All shipments made have been billed
B. No shipment has been billed more than once
C. Each shipment has been billed for the proper amount
 D. All of the above are of concern to the auditor

304. Which of the following control procedures may prevent the failure to bill customers for some
shipments?
A. Each sales order should be approved by authorized personnel
B. Each sales invoice should be supported by a shipping document
C. Sales journal entries should be reconciled to daily sales summaries
D. Each shipment should be supported by a pre-numbered sales invoice that is accounted
for

305. Which of the following would the auditor consider to be an incompatible operation if the
cashier receives remittance from the mailroom?
A. The cashier endorses the checks
B. The cashier prepares the daily deposit
C. The cashier makes the daily deposit at a local bank
D. The cashier posts the receipts to the accounts receivable subsidiary ledger cards

306. Internal control over cash receipts is weakened when an employee who receives customer
mail receipts also:
A. Maintains a petty cash fund
B. Prepare initial cash receipts records
C. Prepares bank deposit slips for all mail receipts
D. Records credits to individual accounts receivables

307. The most difficult type of cash defalcation for the auditor to detect is that which occurs:
A. In amounts under 100
B. Before the cash is recorded
C. Out of the balance kept in the cash register
D. After cash is recorded but before it goes to the bank

308. Which of the following would be the best protection for a company that wishes to prevent
the “lapping” of the trade account receivable?
A. Have customers send payments directly to the company’s depository bank
B. Segregate duties so that the bookkeeper in charge of the general ledger has no access to
incoming mail
C. Request that customer’s payment checks be made payable to the company and
addressed to the treasurer
D. Segregate duties to that no employee has access to both checks from customers and
currency from daily cash receipts

309. The two most important considerations the auditor should keep in mind in the verification of
the write-off of individual uncollectible accounts are:
A. Cut-off and authorization C. Validity and authorization
B. Cut-off and completeness D. Validity and completeness
310. An auditor tests an entity’s policy of obtaining credit approval before shipping goods to
customers in support of management’s financial statement assertion of
A. Completeness C. Rights and obligations
B. Existence of occurrence D. Valuation or allocation

311. To gather audit evidence about the proper credit approval of sales, the auditor would select
a sample of documents form the population represented by the
A. Bill of lading file
B. Sales invoice file
C. Customer order file
D. Subsidiary customer’s accounts ledger

312. The purpose of tests of controls over billing is to determine whether

A. Shipments are billed
B. Billed goods have been shipped
C. Credit is approved before goods are billed
D. Billing department personnel are competent

313. To verify that all sales transactions have been recorded, a test of transactions should be
completed on a representative sample drawn from
A. The shipping documents
B. Entries in the sales journal
C. The billing clerk’s file of sales orders
D. A file of duplicate copies of sales invoices for which all pre-numbered forms in the series
have been accounted for

314. Which of the following audit procedures would an auditor most likely perform to test control
relating to management’s assertion concerning the completeness of sales transactions?
A. Compare the invoiced prices on sales invoices to the entity’s authorized price list
B. Inquire about the entity’s credit granting policies and the consistent application of credit
checks
C. Inspect the entity’s reports of pre-numbered shipping documents that have not been
recorded in the sales journal
D. Verify that extensions and footings on the entity’s sales invoices and monthly customer
statements have been recomputed

315. The objectives of the internal structure for a production cycle are to provide assurance that
transactions are properly executed and recorded, and that
A. Independent internal verification of activity reports is established
B. Production orders are pre-numbered and signed by a supervisor
C. Custody of work in process and of finished goods is properly maintained
D. Transfers to finished goods are documented by a completed production report and
quality control report
316. The auditor’s test of adequacy of physical controls over raw materials, work-in-process and
finished goods must be restricted to:
A. Documentation and confirmation
B. Documentation and inquiry
C. Documentation and observation
D. Observation and inquiry

317. A major difficulty in the verification of inventory cost records is determining the
reasonableness of
A. The cost allocations
B. The direct labor hourly rate
C. The raw materials cost per unit
D. All of the answers

318. Which of the following control procedures could best prevent direct labor from being charged
to manufacturing overhead?
A. Reconciliation of works in process inventory with cost records
B. Comparison of daily journal entries with factory labor summary
C. Examination of routing tickets from finished goods on delivery
D. Re-computation of direct labor based on inspection of time cards

319. An auditor’s tests of client’s cost accounting system are designed primarily to determine that:
A. Physical inventories substantially agree with book inventories
B. The system complies with generally accepted accounting principles and functions as
planned
C. Costs have been assigned properly to finished goods, work in process and cost of goods
sold
D. Quantities on hand have been computed based on an acceptable methods that
reasonably approximate actual quantities on hand

320. A useful starting point for becoming familiar with the client’s inventory is for the auditor to:
A. Tour the client’s facilities
B. Read the client’s accounting manual
C. Read the PICPA’s Industry Audit Guide
D. Review accounting theory covering special problems such as oil and gas accounting or
accounting for lease-purchase agreements

321. When perpetual inventory records are maintained in quantities and in pesos, and internal
control procedures over inventory are deficient, the auditor would probably:
A. Have to disclaim an opinion on the income statement that year
B. Increase the extent of tests for unrecorded liabilities at the end of the year
C. Want the client to schedule the physical inventory count at the end for the year
 D. Insist that the client perform physical counts of inventory items several times during the
year

322. A request by an authorized employee for goods or services is made on the:

A. Acquisition transaction file C. Purchase order
B. Debit memo D. Purchase requisition

323. A document indicating a reduction in the amount owed to a vendor because of returned
goods is
A. A credit memo C. A receiving room report
B. A debit memo D. A shipping room report

324. A document indicating a reduction in the amount owed to the vendor because of returned
goods is known as:
A. Purchase adjustment slip
B. Receiving room report
C. Shipping room report
D. Vendor-issued credit memo

325. In the purchasing disbursement cycle, of the order of activities listed, which is in the best
order of a typical sequence of activities?
A. Ordering goods, receiving goods, receiving vendor’s invoice, cash payments
B. Ordering goods, receiving vendor’s invoice, receiving goods, payment activity
C. Ordering goods, receiving vendor’s invoice, selecting authorized vendor, payment activity
D. Selecting authorized vendor, receiving vendor’s invoice, receiving goods, payment activity

326. The purchase order, usually in writing, is a legal document that is:
A. An offer to buy
B. Not enforceable if it is no in writing
C. A binding agreement between client and vendor
D. An acceptance of a vendor’s catalog offers to sell

327. Proper authorization for acquisitions ensures that the client will not:
A. Be overbilled by the vendor
B. Purchase excessive or unnecessary items
C. Run out of stock before the next shipment arrives
D. All three of the above

328. The authority to accept incoming goods in receiving should be based on a(n):
A. Approved purchase order C. Materials requisition
B. Bill of lading D. Vendor’s invoice

329. The personnel in the Receiving Department should:

A. Be independent of both the storeroom and accounting functions
 B. Be supervised by the Shipping Department since the receiving docks and the shipping
docks are in close proximity
C. Be supervised by the head of the storeroom, since it is the storeroom personnel who are
responsible for the physical control of goods
D. Be supervised by the Accounting Department, since it is the accounting personnel who
are responsible for the accuracy of the records about the goods

330. Internal control is strengthened when the quantity of merchandise ordered is omitted from
the copy of the purchase order sent to the
A. Accounts payable department
B. Department that initiated the requisition
C. Purchasing agent
D. Receiving department

331. The receipt of goods and services in the normal course of business represents the date clients
normally recognize:
A. Expenses C. The liability
B. Income D. Warranty assets

332. The document which specifies the amount of money owed to the vendor for an acquisition is
the:
A. AP trial balance C. Receiving report
B. Purchase order D. Vendor’s invoice

333. Matching the supplier’s invoice, the purchase order, and the receiving report normally should
be the responsibility of the
A. Accounting function
B. Purchasing function
C. Treasury function
D. Warehouse receiving function

334. The accounts payable department usually has the responsibility for verifying the propriety of
acquisition by comparing the details on the:
A. Vendor’s invoice and the receiving report
B. Vendor’s invoice and the purchase requisition
C. Purchase order, receiving report and the vendor’s invoice
D. Purchase requisition, purchase order and receiving report

335. For effective internal control, the accounts payable department should compare the
information on each vendor’s invoice with the
A. Receiving report and the voucher
B. Vendor’s packing slip and the voucher
C. Receiving report and the purchase order
D. Vendor’s packing slip and the purchase order
336. A CPA learns that his client has paid a vendor twice for the same shipment, once based upon
the original invoice and once based upon the monthly statement. A control procedure that
should have prevented this duplicate payment is
A. Prenumbering of receiving reports
B. Use of a limit or reasonableness test
C. Prenumbering of disbursement vouchers
D. Attachment of the receiving report to the disbursement report

337. A client erroneously recorded a large purchase twice, which of the following internal control
measures would be most likely to detect this error in a timely and efficient manner?
A. Footing the purchase journal
B. Sending written quarterly confirmation to the vendors
C. Tracing totals from the purchases journal to the ledger accounts
D. Recording the vendors’ monthly statements with subsidiary payable ledger accounts

338. Which of the following controls is not usually performed in the accounting department?
A. Mailing of the check
B. Matching the receiving report with purchase order
C. Having an authorized person approve the voucher
D. Determining the mathematical accuracy of the vendor’s invoice

339. The internal control which requires that “checks are pre-numbered and accounted for”
satisfies the objective of
A. Accuracy C. Existence
B. Completeness D. Posting and summarization

340. For good internal control, the person who should sign checks is the:
A. Accounts payable clerk C. Purchasing agent
B. Person preparing the checks D. Treasurer

341. When processing and recording cash disbursement, it is important to have method of
cancelling the supporting documents to prevent their re-use as support to another check at a
later time. A common method is to:
A. Shred the documents so that they can’t be used
B. Write the check number on the supporting documents
C. Move the documents to a permanent off-site facility such as warehouse
D. Transfer possession of the documents to a blank vault such as safety deposit box

342. The mailing of disbursement checks, and remittance advices should be controlled by the
employee
A. Who signed the checks last
B. Who approved the vouchers for payment
C. Who matched the receiving reports, purchase orders, and vendor’s invoices
 D. Who verified the mathematical accuracy of the vouchers and remittance advices

343. Bell’s accounts payable clerk has a brother who is one of Bell’s vendors. The brother will often
invoice Bell twice for the same delivery. The accounts payable clerk removes the receiving
report for the first invoice from the paid-vouchers files and uses it for support of payment for
the duplicate invoice. The most effective procedure for preventing this activity is to:
A. Use dual signatures
B. Use pre-numbered receiving reports
C. Cancel vouchers and supporting documents when payment is made
D. Mail signed checks without allowing them to be returned to the accounts payable clerk

344. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher
register to the supporting documents. Which assertion would this test of controls most likely
pertain to?
A. Completeness C. Rights and obligations
B. Existence or occurrence D. Valuation or allocation

345. In the personal and payroll cycle, of the order of activities listed, which is the best order of a
typical sequence of activities?
A. Labor relations, personnel hiring, payroll distribution, payroll accounting
B. Personnel hiring, labor relations, attendance and work, payroll accounting
C. Personnel hiring, attendance and work, payroll distribution, payroll accounting
D. Attendance and work, payroll accounting, cash disbursement, payroll distribution

346. Which of the following describes the proper internal control over payroll?
A. The payment of cash to employees should be replaced with payments by checks
B. The preparation of the payroll must be under the control of the personnel department
C. The confidentiality of employee payroll data should be carefully protected to prevent
fraud
D. The duties of hiring, payroll computation and payment to employees should be
segregated

347. Which of the following departments most likely would approve changes in pay rates
deductions from employee salaries?
A. Controller C. Personnel
B. Payroll D. Treasury

348. Which of the following procedures is most likely to ensure that employee job time tickets are
accurate?
A. Check the employee time cards against the time job tickets
B. Approve the payroll voucher in the accounts payable department
C. Keep employment information in the human resources department
D. Make sure that the number of hours per week on each employee’s job time ticket is not
more than 40 hours
349. For appropriate segregation of duties, journalizing and posting summary payroll transactions
should be assigned to:
A. General accounting
B. Payroll accounting
C. The timekeeping department
D. The treasurer’s department

350. For internal control purposes, which of the following individuals should preferably be
responsible for the distribution of payroll checks?
A. The internal auditor
B. A bank representative
C. The company paymaster
D. A member of the accounting department

351. To minimize the opportunities for fraud, unclaimed cash payroll should be
A. Held by the controller
B. Held by the payroll custodian
C. Deposited in a safe deposit box
D. Deposited in a special bank account

352. Which of the following controls would be the most appropriate means to ensure that
terminated employees have been removed from the payroll?
A. Mailing checks to employees’ residences
B. Reconciling payroll and time-keeping records
C. Establishing computerized limit checks on payroll dates
D. Establishing direct deposit procedures with the employees’ banks

353. Which of the following classes of transactions is not included in the acquisition and payment
cycle?
A. Cash disbursements
B. Cash receipts
C. Purchase discounts
D. Purchase returns and allowances

354. An effective internal control procedure covering fixed asset additions should require:
A. Authorization and approval of major fixed asset additions
B. Capitalization of the cost of fixed asset addition in excess of a specific peso amount
C. Performance of recurring fixed asset maintenance work solely by company maintenance
staff
D. Classification as investments of those fixed asset additions that are not used in the
business

355. Which of the following is not a key control in the acquisition and payment cycle?
 A. Authorization of credit
B. Authorization of payments
C. Authorization of purchases
D. Timely recording and independent view of transactions

356. Which of the following departments typically has responsibility for verifying the propriety of
acquisition transactions?
A. Accounts payable department C. Purchases department
B. Accounts receivable department D. Sales department

357. To strengthen control procedures over the custody of heavy mobile equipment, the client
would most likely institute a policy requiring a periodic
A. Accounting of work orders
B. Increase in insurance coverage
C. Verification of liens, pledges and collateralizations
D. Inspection of equipment and reconciliation with accounting records

358. The emphasis in auditing manufacturing equipment is on the verification of:

A. The current period’s acquisitions and retirements
B. The balance carried forward in the amount from the previous period (beginning balance)
C. The balance in the account after the current year’s activities are recorded (ending
balance)
D. All three of the above

359. Which of the following is an internal control weakness related to the acquisition of
equipment?
A. Depreciation policies are reviewed only once a year
B. Advance executive approvals are required for equipment acquisitions
C. Acquisitions are to be made thorough and approved by the department in need of the
equipment
D. Variances between authorized equipment expenditures and actual costs are to be
immediately reported to management

Communication of Internal Control Findings

360. Which of the following is true about the auditor’s communication of material weaknesses
noted during the audit of financial statements?
A. No communication is necessary
B. The communication should be in writing
C. The communication would ordinarily be done orally
D. Oral communication may be made provided it is documented in the working papers

361. The auditor shall communicate significant deficiencies in internal control identified during the
audit to those charged with governance on a timely basis. Such communication:
 A. Must be in writing
B. Must be done orally
C. May be done orally or in writing
D. Is not required by the Philippine Standards on Auditing

362. When CPA firms do an audit of historical financial statements, part of the audit usually
consists of identifying operational problems and making recommendations can be made
orally but they are typically made by use of a
A. Client letter C. Letter of representations
B. Engagement letter D. Management letter

363. Which of the following statements is incorrect?

I. The auditor shall determine whether, on the basis of the audit work performed, the
auditor has identified one or more deficiencies in internal control
II. If the auditor has identified one or more deficiencies in internal control, the auditor shall
determine, on the basis of the audit work performed, whether, individually or in
combinations, they constitute significant deficiencies
III. The auditor shall communicate, orally or in writing, significant deficiencies in internal
control identified during the audit to those charged with governance on a timely basis
A. I only C. III only
B. II only D. All of the above
 Audit Objectives, Evidence & Procedures

Management assertions

1. Broadly defined, the subject matter of any audit consists of

A. Operating data
B. Economic data
C. Financial statements
D. Assertions about economic actions and events

2. Management assertions are

A. Stated in the footnotes to the financial statements
B. Explicitly expressed representations about the financial statements
C. Provided to the auditor I the assertions letter, but are not disclosed on the financial
statements
D. Implied or expressed representations about classes of transactions and the related accounts
in the financial statements

3. If the auditor were responsible for making certain that all the assertions of management in the
statements were correct
A. Bankruptcies could no longer occur
B. Audits would be much easier to complete
C. Audits would not be economically feasible
D. Bankruptcies would be reduced to a very small number

4. An audit involves ascertaining the degree of correspondence between assertions and established
criteria in the case of financial statement audit, which of the following is not a valid criteria?
A. Philippine Standards on Auditing
B. International Accounting Standards
C. Other authoritative financial reporting framework
D. Accounting standards generally accepted in the Philippines

5. Which of the following assertions does not relate to balances at period end?
A. Existence C. Rights and Obligation
B. Occurrence D. Valuation or allocation

6. Which of the following statements concerning the auditor’s use of assertions is correct?
A. There should always be a separate assertion relation to cutoff of transactions and events
B. The auditor may combine the assertions about transactions and events with assertions about
account balances
C. The completeness assertion deals only with whether all transactions and events that should
have been recorded
 D. In every audit engagement, the auditor should always fall into as described in PSA 500, i.e.,
the assertions should always fall into three categories: assertions about classes of
transactions and events, account balances, and presentation and disclosure

7. During an audit of a company’s stockholders’ equity accounts, the auditor determines whether
there are restrictions on retained earnings resulting from loans, agreements, or law. This audit
procedure most likely is intended to verify management’s assertion of
A. Completeness
B. Existence
C. Presentation and disclosure
D. Valuation and allocation

Audit objectives

8. Which of the following statements about the existence and completeness objectives is not true?
A. The completeness objective deals with unrecorded transactions
B. The existence and completeness objectives emphasize opposite audit concerns
C. Existence deals with overstatements and completeness deals with understatements
D. Existence deals with understatements and completeness deals with overstatements

9. The general audit objective of validity and completeness emphasize opposite audit concerns:
A. Validity always deals with overstatements only
B. Validity deals with potential overstatement and completeness deals with understatement
C. Validity deals with potential understatement and completeness deals with overstatement
D. Validity and completeness may each deal with overstatements or understatements, but not
in the same transaction

10. In testing for cut-off, the objective is to determine

A. Whether transactions are recorded in the proper period
B. Whether all of the current period’s transactions are recorded
C. That no transactions from the prior period are included in the current period’s balances
D. That no transactions of the current period have been delayed and recorded in a future period

Audit evidence

11. The information obtained by the auditor in arriving at the conclusions on which the audit opinion
is based is called:
A. Audit assertions C. Audit standards
B. Audit evidence D. Audit working papers

12. In “auditing” financial accounting data, the primary concern is with

A. Determining if fraud has occurred
B. Determining if taxable income has been calculated correctly
C. Analyzing the financial information to be sure that it complies with government requirements
 D. Determining whether recorded information properly reflects the economic events that
occurred during the accounting period

13. The major reason an independent auditor gathers evidence is to

A. Detect fraud
B. Evaluate management
C. Evaluate internal control
D. Form opinion on the financial statements

14. Which of the following “decisions” are relevant to the auditor’s evidence accumulation?
A. Number of items to examine
B. Timing of audit procedures
C. Type of audit procedure to use
D. All of the above are relevant

15. Evidence may take which of the following forms?

A. Observations made by auditor
B. Written communications from company employees or outsiders
C. Oral responses to the auditor from employees of the company under audit
D. Evidence may take nay of the above forms

16. An entity’s accounting records generally include the records of initial entries and supporting
records including
A. Confirmations from third parties
B. Worksheets and spreadsheets supporting costs allocations
C. Information obtained by the auditor from such audit procedures as inquiry, observation and
inspection
D. Other information developed by, or available to, the auditor to permit him/her to reach
conclusions through valid reasoning

17. The official record of the meetings of the board of directors and stockholders is contained in the
corporate
A. Bylaws C. License
B. Charter D. Minutes

18. An auditor should examine minutes of the board of directors’ meetings

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

19. An example of external documents is

A. Bank statements
B. Employee’s time reports
 C. Carbon copies of check vouchers
D. Purchase order for company purchases

20. The reliability of data is influenced by its source and by its nature and is dependent on the
circumstances under which it is obtained. Which of the following should the auditor consider in
determining whether the data is reliable for purposes of designing substantive analytical
procedures?
I. Source of the information available
II. Comparability of the information available
III. Nature and relevance of the information available
IV. Controls over the preparation of the information
A. I, III and IV only C. I, II and III only
B. II, III and IV only D. I, II, III and IV

21. Which of the following forms of evidence is most reliable?

A. General ledger account balances
B. Copy of month-end adjusting entries
C. Internal memo explaining the issuance of a credit memo
D. Confirmation of receivable balances received from a customer

22. Evidence obtained directly by the auditor will not be reliable if

A. The client denies its veracity
B. It is provided by the client’s attorney
C. The auditor lacks the qualifications to evaluate the evidence
D. It is impossible for the auditor to obtain additional corroboratory evidence

23. The strongest criticism of the reliability of audit evidence that the auditor physically observes is
that
A. The client may conceal items from the auditor
B. Such evidence is too costly in relation to its reliability
C. The observation must occur at a specific time, which is often difficult to arrange
D. The auditor may not be qualified to evaluate the items which he or she is observing

24. Which of the following presumptions does not relate to the reliability of audit evidence?
A. The more effective the internal control structure, the more assurance it provides about the
accounting data and financial statements
B. Evidence obtained from independent sources outside the entity is more reliable than
evidence secured solely within the entity
C. An auditor’s opinion, to be economically useful, is formed within reasonable time and based
on evidence obtained at a reasonable cost
D. The independent auditor’s direct personal knowledge, obtained through observation and
inspection, is more persuasive than information obtained indirectly
25. In determining the quantity and quality of evidence to gather, the audit will be satisfied when the
evidence is
A. Completely convincing C. Irrefutable
B. Conclusive D. Persuasive

26. Evidence is usually more persuasive for balance sheet accounts when it is obtained
A. As close to the balance sheet data as possible
B. From various times throughout the client’s year
C. Only from transactions occurring on the balance sheet date
D. From the time period when transactions in that account were most numerous during the fiscal
period

27. Which of the following forms of evidence would be least persuasive in forming the auditor’s
opinion?
A. The auditor’s count of marketable securities
B. Minutes of the board of directors authorizing the purchase of stock as an investment
C. Responses to auditor’s questions by the president and controller regarding the investments
account
D. Correspondence with a stockholder regarding the quantity of client’s investments held in
street name by the broker

28. Which one of the following is not one of the characteristics of competent evidence?
A. Size of the sample
B. Degree of objectivity
C. Independence of provider
D. Effectiveness of internal control structure

29. Evidence is generally considered competent when

A. It has been obtained by random selection
B. It has the qualities of being relevant, objective and free from known bias
C. It consists of written statements made by managers of the enterprise under audit
D. There is enough of it to afford a reasonable basis for an opinion on financial statements

30. Evidence obtained directly by the auditor is more competent than information obtained
indirectly. Which of the following is not an example of the auditor’s direct knowledge?
A. Computation C. Observation
B. Inquiry D. Physical examination

31. The measure of quality of audit evidence and its relevance to a particular assertion and its
reliability
A. Appropriateness C. Significance
B. Assurance D. Sufficiency
 32. Which of the following would least likely affect the appropriateness of evidence available to an
auditor?
A. The timeliness of such evidence
B. The relationship of the preparer of such evidence to the entity being audited
C. The relevance of such evidence to the financial statements assertion being verified
D. The sampling method employed by the auditor to obtain a sample of such evidence

33. Evidential matter is generally considered sufficient when

A. It is appropriate
B. It has been obtained by random selection
C. It has the qualities of being relevant, objective and free from unknown bias
D. There is enough of it to afford a reasonable basis for an opinion on financial statements

34. Theoretically, which of the following would not have an effect on the amount of audit evidence
gathered by the auditor?
A. The type of opinion to be issued
B. The auditor’s evaluation of internal control
C. The types of audit evidence available to the auditor
D. Whether or not the client reports to the Securities and Exchange Commission

35. The sufficiency and appropriateness of evidential matter ultimately is based on the
A. Availability of corroborating data C. Pertinence of the evidence
B. Judgement of the auditor D. PSA

36. An auditor should be able to collect and evaluate documentary evidence. When evaluating and
interpreting evidence, the auditor must be on guard against the possibility of drawing
unwarranted conclusions. An example of a valid conclusion is:
A. Correct inventory valuation as determined from observation of physical count
B. Client ownership determined from third-party inquiries about consigned goods
C. Proper accounts payable cut-off at reporting date as determined by a review of raw materials
requisitions
D. Existence of a company travel vehicle determined from the examination of the paid invoice
for the said vehicle

Substantive audit procedures

37. Refers to an audit procedure deemed necessary in the circumstances to achieve the objective of
the audit
A. Audit program C. Scope of an audit
B. Scope of a review D. Scope limitation

38. Substantive procedures are tests performed to obtain audit evidence to detect material
misstatements in the financial statements. These include
A. Substantive analytical procedures
 B. Test of details of balances
C. Test of details of transactions
D. All of the above

39. 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. PSA
B. The auditor program
C. The auditor’s judgment
D. The auditor’s working papers

40. A procedure designed to test for monetary misstatements directly affecting the correctness of
financial statement balances is a
A. Monetary-unit sampling test C. Test of attributes
B. Substantive tests D. Test of control

41. Which of the following tests commonly occur together?

A. Analytical procedures and tests of controls
B. Substantive tests of transactions and tests of controls
C. Substantive tests of transactions and obtaining an understanding of internal controls
D. All of the above commonly occur together

42. When designing audit procedures, the direction of test is a crucial step in satisfying the
A. Classification objective C. Cut-off objective
B. Completeness objective D. Valuation objective

43. The auditor traces items from the source documents to the journal order to satisfy the
A. Completeness objective C. Validity objective
B. Ownership objective D. Valuation objective

44. At what point in the audit are tests of details most appropriately designed?
A. Engagement valuation C. Testing
B. Planning D. Any of the above

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

A. Balance sheet accounts
B. Cash flow statement account
C. Income statement accounts
D. All of the above

46. Test of details of balances are directed to

A. Balance sheet accounts for all cycles
B. Income statement accounts for all cycles
C. All general ledger accounts for all cycles
 D. Balance sheet accounts for some cycles and income statement accounts for other cycles

47. Tests of details of balances are specific procedures intended to

A. Prove that the trial balance is in balance
B. Identify the details of the internal control system
C. Test of monetary errors in the balances in the financial statements
D. Prove that the accounts with material balances are classified correctly

48. If the auditor has obtained a reasonable level of assurance about the fair presentation of the
financial statements through understanding internal control, assessing control risk, testing
controls, substantive tests of transactions, and analytical procedures, then the auditor
A. Can write the engagement letter
B. Can issue an unqualified opinion
C. Can significantly reduce the test of details of balances
D. Needs to do additional tests of controls so that the assurance level can be increased

49. Most auditor prefer to replace tests of details with analytical procedures whenever possible
because
A. The tests of details are more expensive
B. The analytical procedures are more reliable
C. The analytical procedures are more persuasive
D. The tests of details are more difficult to interpret

50. If the results of tests of controls, substantive tests of transactions, and analytical procedures are
not consistent with the predictions, the tests of details of balances will be
A. Changed C. Increased
B. Eliminated D. Unaffected

51. For which of the following account balances are substantive tests of details least likely to be
performed unless analytical procedures indicate the need to extend detail testing?
A. Marketable securities
B. Payroll expense
C. Research and development costs
D. Uncollectible accounts expense

52. Which of the following income statement accounts is least likely to be verified in conjunction with
the audit of a balance sheet account?
A. Depreciation expense
B. Interest revenue
C. Travel and entertainment
D. Uncollectible account expense

53. Which one of the following statements is true in deciding on substantive tests of transactions?
A. The materiality of the item will not influence the choice of procedures used
 B. Results obtained in the prior year’s audit will not affect the procedures used this year
C. Some procedures are commonly employed on every audit regardless of the circumstances
D. All procedures are dependent on the adequately of the controls and the results of the test of
controls

54. When an auditor calculates the gross margin as a percent of sales and compares it with previous
periods, this type of evidence is called
A. Analytical procedures C. Observation
B. Inquiry D. Physical examination

55. It involves analysis of significant ratios and trends including the resulting investigation of
fluctuations and relationships that are inconsistent with other relevant information or which
deviate from predicted amounts
A. Analytical procedures C. Reasonable test
B. Ratio analysis D. Trend analysis

56. The following are the purposes of analytical procedures, except:

A. As an overall review of the financial statements in the final review stage of the audit
B. Assist the auditor in planning the nature, timing and extent of other audit procedures
C. As a test to obtain audit evidence about the suitability of design and effective operation of
internal controls
D. As a substantive procedure when their use can be more effective or efficient than tests of
details in reducing detection risks for specific financial statements assertions

57. In which stage(s) of an audit can analytical procedures be performed?

A. In planning stage
B. In the completion stage
C. In conjunction with tests of transactions and tests of details of balances
D. During all three stages

58. Auditors are required to apply analytical procedures

A B C D
In the planning stage Yes Yes No No
As a substantive test Yes No Yes No
In the review stage Yes Yes Yes No

59. The PSA has concluded that analytical procedures are so important that they are required during
A. Planning and testing phases
B. Testing and completion phases
C. Planning and completion phases
D. Planning, testing and completion phases

60. Analytical procedures are those that

A. Evaluate the accuracy of the account balances
 B. Review the effectiveness of internal control procedures
C. Assess the overall reasonableness of transactions and balances
D. Analyze the effect of management procedures on the accounting system

61. Analytical review procedures are

A. Substantive tests designed to evaluate the client’s system of internal control
B. Compliance tests designed to evaluate the validity of management assertions
C. Substantive tests designed to evaluate the reasonableness of the client’s financial information
D. Compliance tests designed to evaluate the reasonableness of the client’s financial information

62. The primary purpose of performing analytical procedures in the testing phase of an audit is to
A. Reduce tests of details of balances
B. Assess the going concern assumption
C. Indicate possible misstatements (attention directing)
D. Help the auditor obtain an understanding of the client’s industry and business

63. Analytical procedures applied as a substantive test assist the auditor in

A. Identifying areas of potential risk
B. Understanding the client’s business
C. Determining the validity of the conclusions reached
D. Reducing the detection risk for specific financial statement assertion

64. One reason why an auditor makes an analytical review of the client’s operations is to identify
A. Unusual transactions
B. Non-compliance with prescribed control procedures
C. Improper separation of accounting and other financial duties
D. Weakness of a material nature in the system of internal accounting control

65. An example of an analytical procedure is the comparison of:

A. Recorded amounts of major disbursements with appropriate invoices
B. EDP-generated data with similar data generated by a manual accounting system
C. Results of statistical sample with the expected characteristics of the actual population
D. Financial information with similar information regarding the industry in which the entity
operates

66. Which of the following comparisons is most useful to an auditor in evaluating the results of an
entity’s operations?
A. Current year revenue to budgeted current year revenue
B. Prior year accounts payable to current year accounts payable
C. Current year warranty expense to current year contingent liabilities
D. Prior year payroll expense to budgeted current year payroll expense

67. Which of the following is not one of the major types of analytical procedures?
 A. Compare client with budget
B. Compare client with prior year
C. Compare client with SEC averages
D. Compare client with industry averages

68. Which of the following is not a typical analytical review procedure?

A. Comparisons of the financial information with budgeted amounts
B. Comparisons of recorded amounts of major disbursements with appropriate invoices
C. Study of relationship of the financial information with relevant non-financial information
D. Comparison of the financial information with similar information regarding the industry in
which entity operates

69. Which of the following would not be considered an analytical procedure?

A. Compare current year’s working capital to prior year’s
B. Compare current year’s operating expenses to prior year’s
C. Calculate the gross profit ratio and compare it to the industry figure
D. Compare the per unit price on a sales invoice to the master price list

70. Which of the following tends to be most predictable for purposes of analytical procedures applies
as substantive tests?
A. Data subject to audit testing in the prior year
B. Transactions subject to management discretion
C. Relationships involving balance sheet accounts
D. Relationships involving income statement accounts

71. For which of the following account balances are substantive tests of details least likely to be
performed unless analytical review procedures indicate the need to extend detail testing?
A. Available for sale securities C. Marketing expense
B. Interest expense D. Revaluation surplus

72. Which of the following analytical procedures, should be applied to the income statement?
A. Select sales and expense items and trace amounts to related supporting documents
B. Obtain from the client representatives, the beginning and ending inventory amounts that
were used to determine cost of sales
C. Ascertain that the new income amount in the statement of cash flows agrees with the net
income amount in the income statement
D. Compare the actual revenues and expenses with the corresponding figures of the previous
year and investigate significant differences

73. Of the following procedures, which does not produce analytical evidence?
A. Confirm customers’ accounts receivable and clear all material exceptions
B. Examine monthly performance reports and investigate significant revenue and expense
variances
 C. Compare sales trends and profit margin with industry averages and investigate significant
differences
D. Compare revenue, cost of sales, and gross profit with the prior year and investigate significant
variations

74. Significant unexpected differences is identified by analytical procedures will usually necessitate
a(an):
A. Auditor’s investigation
B. Review of the internal control structure
C. Explanation in the representation letter
D. Consistency explanatory paragraph added to the audit report

75. When analytical procedures identify significant fluctuations or relationships or relationships that
are inconsistent with other relevant information or that deviate from predicted amounts, the
auditor should
A. Conduct further investigation
B. Withdraw from the engagement
C. Examine all corroborating evidence available
D. Assume that the financial statements contain material errors or fraud

76. Investigation of unusual fluctuations ordinarily begins with

A. Inquiries of management
B. Applying additional modified procedures
C. Comparison of financial information with expectations
D. Obtaining evidence to corroborate management’s representation

77. 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 a disclaimer
B. Issue either a qualified or an adverse opinion
C. Issue either a qualified opinion or a disclaimer
D. Design other appropriate audit procedures to determine if such errors do exist

78. When analytical procedures identify significant fluctuations or relationships that are inconsistent
with other relevant information or that deviate from predicted amounts, the auditor should
investigate and obtain explanations and appropriate corroborative audit evidence. The auditor’s
investigation of unusual fluctuations and relationship ordinarily begins with inquiries of
management followed by
I. Corroboration of management’s responses
II. Considering of the need to apply other audit procedures based on the results of such inquiries,
if management is unable to provide an explanation or if the explanation is not considered
adequate
A. I only C. Both I and II
 B. II only D. Neither I or II

79. Two analytical procedures available to the auditor are:

I. Compare current year’s balances with the preceding year
II. Compare details of a particular account’s balance with the preceding year
Shortcoming of these two procedures are that
A. It is difficult, time consuming and therefore, costly to perform these procedures
B. Both fail to consider growth or decline in business activity and ignore relationships of data
C. The first ignores relationships of data to other data and the second fails to consider growth
or decline in business activity
D. The first fails to consider growth or decline in business activity and the second ignores
relationships of data to other data

80. Which of the following is least likely to be comparable between similar corporations in the same
industry line of business?
A. Operating cycle
B. Earnings per share
C. Accounts receivable turnover
D. Return on total assets before interest and taxes

81. Which of the following statements concerning analytical procedures is correct?

A. Analytical procedures are usually effective and efficient for tests of controls
B. Analytical review may be omitted entirely for some financial statement audits
C. Analytical procedures used in planning an audit should not use non-financial information
D. Analytical procedures alone ay provide the appropriate level of assurance for some assertions

82. Which of the following statements regarding analytical procedures is not correct?
A. Analytical procedures are required on all audits
B. Analytical procedures are required on all review service engagements
C. For certain accounts with small balances, analytical procedures alone may be sufficient
evidence
D. The definition of analytical tests places the emphasis on the comparison of the client’s
recorded data PFRS

83. The following statements relate to the use of analytical procedures as substantive procedures.
Which if false?
A. Substantive analytical procedures are applicable when there is only a small volume of
transactions
B. The application of substantive analytical procedure is based on the expectation that
relationships among data exist and continue in the absence of known conditions to the
contrary
C. The presence of relationships among data provides evidence as to the completeness, accuracy
and occurrence of transactions captured in the information produced by the entity’s
information system
 D. Reliance on the results of substantive analytical procedures will depend on the auditor’s
assessment of the risk that the analytical procedures may identify relationships as expected
when, in fact, a material misstatement exists

84. The process of obtaining and evaluating audit evidence through a direct communication from a
third party in response to a request for information about a particular item affecting assertions
made by the engagement in the financial statements is called
A. External confirmation C. Recalculation
B. Inquiry D. Reperformance

85. Communication addressed to the debtor requesting him or her to confirm whether the balance
as stated on the communication is correct or incorrect is a
A. Bank confirmation C. Negative confirmation
B. Dunning letter D. Positive confirmation

86. An auditor would be least likely to use confirmations in connection with the examination of
A. Inventories
B. Long-term debts
C. Property, plant and equipment
D. Stockholder’s equity

87. Auditors may use positive and/or negative forms of confirmation requests. An auditor most likely
will use
A. The negative form for small balances
B. The positive form to confirm all balances regardless of size
C. A combination of the two forms, with the positive form used for trade balances and the
negative form for other balances
D. The positive form, when the combined assessed level of inherent and control risk for related
assertions is acceptably low and the negative form when it is unacceptably high

88. Which of the following statements is not true? The evidence gathering technique of inquiry
A. Cannot be regarded as conclusive
B. Requires the gathering of corroborative evidence
C. Does not provide evidence from an independent source
D. Is the auditor’s principal method of evaluating the client’s internal control

89. An audit procedure that involves examining records, documents, or tangible assets is
A. Computation C. Observation
B. Inspection D. Tracing

90. An audit procedure that consist of looking at the process or procedure being performed by others
is called
A. Computation C. Inspection
 B. Inquiry D. Observation

91. When the auditor examines the client’s documents and records to substantiate information on
the financial statements, it is commonly referred to as
A. Confirmation C. Physical examination
B. Inquiry D. Vouching

92. An example of vouching would be to

A. Trace from receiving reports to the acquisitions journal
B. Race from cancelled checks to the cash disbursement journal
C. Trace from the acquisitions journal to supporting vendor’s invoices
D. Trace from duplicate bank deposit slips to the cash receipts journal

93. The auditor is concerned that a client is failing to bill customer for shipments. An audit procedure
that would gather relevant evidence would be to
A. Trace a sample of shipping documents to related duplicate sales invoices
B. Trace a sample of Sales Journal entries to the Accounts Receivable Subsidiary ledger
C. Select a sample of duplicate sales invoices and trace each to related shipping documents
D. Compare the total of the Schedule of Accounts Receivable with the balance of the Accounts
Receivable account in the general

94. What is the basis for an auditor’s decision either to apply analytical procedures as substantive
tests or to perform tests of transactions and account balances?
A. Auditor’s familiarity with industry trends
B. Availability of data aggregated at high level
C. Relative effectiveness and efficiency of the tests
D. Timing of tests performed after the balance sheet date

95. All of the following are substantive tests except

A. Analytical procedures
B. Tests of controls
C. Tests of details of balances
D. Tests of details of transactions

96. Shown below (1 through 5) are the five steps of tests which auditors use to determine whether
financial statements are fairly stated. Which three are substantive tests?
1. Procedures to obtain an understanding of internal control
2. Tests of controls
3. Tests of transactions
4. Analytical procedures
5. Tests of balances
A. 1, 2, and 3 C. 2, 3 and 5
B. 2, 3 and 4 D. 3, 4 and 5
Transaction Cycles

97. The most important general ledger account included in and affecting several cycles is the
A. Cash account
B. Inventory account
C. Retained earnings account
D. Income tax expense and liability accounts

98. Which of the following items is not requested on a standard bank account balance confirmation
form?
A. Maturity date of a direct liability
B. The interest rate of a direct liability
C. Description of collateral for a direct liability
D. The principal amount paid on a direct liability

99. Which of the following is one of the better auditing techniques that might be used by an auditor
to detect kiting between intercompany banks?
A. Review subsequent bank statements
B. Prepare a year-end bank reconciliation
C. Prepare a schedule of the bank transfers
D. Review composition of authenticated deposit slips

100. For the most part, the audit of the sales and collection cycle
A. Cannot be performed until the audit of cash is completed
B. Can be performed independently of the audit of other cycles
C. Must be performed first do that the audit of the other cycles can rely on the data
D. Must be performed simultaneously with the audit of the purchases and disbursements
cycle

101. Management’s assertions for sales and collection activities are _________ when sales are
generated via e-commerce activities
A. Decreased C. Mitigated
B. Expanded D. Unchanged

102. The overall objective in the audit of the sales and collection cycle is to evaluate whether
A. The sales account and the accounts receivable account are free of errors
B. The sales account and the accounts receivable account are free of material errors
C. The accounts balances affected by the cycle are fairly presented in accordance with PFRS
D. The sales account and the accounts receivable account are presented fairly in accordance
with PFRS

103. The most reliable form of evidence, other than test of subsequent cash receipts, concerning
the validity of a note receivable is a(n):
A. Bill of lading
 B. Customer purchase order
C. External confirmation reply
D. Sales invoice

104. To test for the possibility of a shipment to a fictitious customer, the auditor traces from the
A. Bill of lading to the credit authorization
B. Credit authorization to the bill of lading
C. Accounts receivable ledger to the bill of lading
D. Sales journal to the accounts receivable ledger

105. The test for recorded sales for which there were not actual shipments, the auditor traces from
the
A. Bill of lading to the sales journal
B. Sales journal to the bill of lading
C. Sales journal to the accounts receivable subsidiary ledger
D. Bill of lading to the supporting customer order and sales order

106. Tracing copies of sales invoices to shipping documents will provide evidence that all
A. Billed sales were shipped
B. Shipments to customers were billed
C. Shipments to customers were recorded are receivables
D. Debits to subsidiary accounts receivable ledger are for sales shipped

107. Tracing bills of lading to sales invoices provides evidence that

A. Invoiced sales were shipped
B. Recorded sales were shipped
C. Shipments to customers were invoiced
D. Shipments to customers were recorded as sales

108. An effective procedure to test for unbilled shipments is to trace from the
A. Sales journal to the shipping documents
B. Shipping documents to the sales journal
C. Sales journal to the accounts receivable ledger
D. Sales journal to the general ledger sales account

109. A CPA auditing an electric utility wishes to determine whether all the customers are being
billed. The CPA’s best direction of tests is from the
A. Meter department record to the billing(sales) register
B. Billing (sales) register to the meter department records
C. Billing (sales) register to the accounts receivable ledger
D. Accounts receivable ledger to the billing (sales) register

110. To test for unsupported entries in the journal, the direction of audit testing should be from
the
 A. Externally generated documents C. Ledger entries
B. Journal entries D. Original source documents

111. The auditor traces items from the journals back to the source documents in order to satisfy
the
A. Completeness objective C. Validity objective
B. Ownership objective D. Valuation objective

112. The most important tests of details of balances for accounts receivable is
A. Confirmations
B. Recalculation of the aged receivables and uncollectible accounts
C. Tracing credit memos for returned merchandise to receiving room reports
D. Tracing from shipping documents to journals to the accounts receivable ledger

113. Confirmation of individual accounts receivable balances directly with debtors will, or itself,
normally provide evidence concerning the
A. Existence of the balances confirmed
B. Ownership of the balances confirmed
C. Collectability of the balances confirmed
D. Internal control over balances confirmed

114. The confirmation of customer’s accounts receivable rarely provides reliable evidence about
the valuation assertions because
A. Customers may not be inclined to report understatement of errors in their accounts
B. Recipients usually respond only if they disagree with the information on the request
C. Auditors typically select many accounts with low recorded balances to be confirmed
D. It is not practicable to ask the customer to confirm detailed information relating to its
ability to pay the account

115. To reduce the risk associated with accepting fax responses to request for confirmation of
accounts receivable, an auditor most likely would
A. Verify the sources and contents of the faxes in telephone calls to the senders
B. Examine the shipping documents that provide evidence for the existence assertion
C. Consider the faxes to be non-responses and evaluate them as unadjusted differences
D. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none
are noted

116. The understatement of sales and accounts receivable is best uncovered by

A. Confirming receivables
B. Reviewing the aged trial balance
C. Test of transactions for shipments made but not recorded
D. Reconciling the accounts receivable general ledger account with the schedule of accounts
receivable
117. In many audits of sales transactions, no substantive tests of transactions are performed for
the completeness objective because
A. Overstatements of assets and income are greater concern than understatements
B. Understatements of assets and income are a greater concern than overstatements
C. It doesn’t matter income is understated because the savings on income tax offsets the
reduced revenue and net income is correct
D. The unrecorded sales causes a reduction of accounts receivable, therefore, the ratios of
the two financial statements will not be misleading

118. An entity’s financial statements were misstated over a period of years due to large amounts
of revenue being recorded in journal entries that involved debits and credits to an illogical
combination of accounts. The auditor could most likely have been alerted to this irregularity
by
A. Performing a revenue cut-off test at year end
B. Scanning the general journal for unusual entries
C. Tracing a sample of journal entries to the general ledgers
D. Examining documentary evidence of sales returns and allowances recorded after year end

119. Cut-off misstatements can occur for all but which of the following in the sales and collection
cycle?
A. Cash payments
B. Cash receipts
C. Sales on account
D. Sales returns and allowances

120. Sales invoices may be recorded in the incorrect accounting period. A computer comparison
of the invoice date with the accounting period when goods were shipped relates to the
A. Completeness assertion
B. Valuation or allocation assertion
C. Existence or occurrence assertion
D. Existence or occurrence assertion and to the completeness assertion

121. To determine the sales transaction have been recorded in the proper accounting period, the
auditor performs a cut-off review. Which of the following best describes the overall approach
used when performing a cut-off review?
A. Examine cash receipts in the subsequent period
B. Confirm year-end transactions with regular customers
C. Analyze transactions occurring within a few days before and after year end
D. Ascertain that the management has included in the representation letter a statement that
transactions have been accounted for in the proper accounting period

122. You are reviewing sales to discover cut-off problems. If the client’s policy is to record sales
when title to the merchandise passes to the buyer, then the books and records would contain
errors if the December 31 entries were for sales recorded
 A. Before the merchandise was shipped
B. Several days subsequent to shipment
C. At the time of the merchandise was shipped
D. At a time other than the point at which the title passed

123. The CPA learns that collections of accounts receivable during the first ten days of January
were entered as debits to cash and credits to accounts receivable as of December 31. The
effect generally will be to
A. Overstate both working capital and current ratio at December 31
B. Overstate the current ratio with no effect on working capital at December 31
C. Overstate working capital with no effect on the current ratio at December 31
D. Leave both working capital and the current ratio unchanged at December 31

124. If inventories are material to the financial statements, the auditor should attend the physical
inventory counts in order to:
A. Inspect the inventory
B. Provide evidence as to the reliability of management procedures
C. Observe compliance with the operations of management’s procedures for recording and
control of results of the count
D. All of the above

125. When outside firms of nonaccountants specializing in the taking of physical inventories are
used to count, list, price and subsequently compute the total peso amount of inventory on
hand at the date of the physical count, the auditor will ordinarily
A. Not reduce the extent of work on the physical count of inventory
B. Consider the reduced audit effort with respect to the physical count of inventory as a
scope limitation
C. Make or observe some physical counts of the inventory recomputed certain inventory
calculations and test certain inventory transactions
D. Consider the report of the outside inventory-taking firm to be an acceptable alternative
procedure to the observation of physical inventories

126. Which of the following is the best audit test to evaluate the accuracy of the inventory records
for materials inventory in a production operation?
A. Perform turnover tests for materials inventory
B. Trace selected inventory receipts to perpetual inventory records
C. Vouch selected postings in the perpetual inventory records to source documents
D. Reconcile quantities on hand per physical counts of selected items with perpetual
inventory records and verify pricing

127. If the perpetual inventory records show lower quantities of inventory than the physical count,
an explanation of the difference might be unrecorded
A. Purchases C. Sales
B. Purchase discounts D. Sales discounts
128. The physical count of inventory of a retailer was higher than shown by the perpetual records.
Which of the following could explain the difference?
A. Credit memos for several items returned by customers had not been recorded
B. No journal entry had been made on the retailer’s books for several items returned to its
suppliers
C. An item purchased “FOB shipping point” had not arrived yet at the date of the inventory
count and had not been reflected in the perpetual records
D. Inventory items had been counted but the tags placed on the items had not been taken
off the items and added to the inventory accumulation sheets

129. The physical count of inventory of a retailer was higher than shown by the perpetual records.
Which of the following could explain the difference?
A. Credit memos for several items returned by customers had not been recorded
B. No journal entry had been made on the retailer’s books for several items returned to its
suppliers
C. An item purchased “FOB shipping point” had not arrived yet at the date of the inventory
count and had not been reflected in the perpetual records
D. Inventory items had been counted but the tags placed on the items had not been taken
off the items and added to the inventory accumulation sheets

130. In an examination of shareholder’s equity, an auditor is most concerned that

A. Capital stock transactions are properly authorized
B. Dividends during the tear under audit were approved by the shareholders
C. Stock splits are capitalized at par or stated value on the dividend declaration date
D. Changes in the accounts are verified by a bank serving as a registrar & stock transfer agent

131. Which of the following types of owners’ equity transactions would require authorization by
the board of directors of a company?
A. Declaration of dividends
B. Issuance of share capital
C. Repurchase of share capital
D. All of the above

132. When no independent stock transfer agents are employed and the corporation issues its own
stocks and maintains stock records, cancelled stock certificates should
A. Be defaced and sent to Secretary of State
B. Be destroyed to prevent fraudulent reissuance
C. Be defaced to prevent reissuance and attached to their corresponding stubs
D. Not be declared but segregated from other stock certificates and retained in a cancelled
certificates file

133. The main focus taken by the auditor in verifying liability balances is on the discovery of
A. Overstated liabilities
 B. Overstated or extraneous liabilities
C. Understated liabilities
D. Understated or omitted liabilities

134. A client’s purchasing system ends with the assumption of a liability and eventual payment of
the liability. Which of the following best describes the auditor’s primary concern with respect
to liabilities resulting from the purchasing system?
A. Accounts payable are not materially understated
B. Authority to incur liabilities is restricted to one designated person
C. Acquisition of materials is not made from one vendor or one group of vendors
D. Commitments for all purchases are made only after established competitive bidding
procedures are followed

135. The auditor gets highly reliable evidence about individual transactions by examining
A. Vendor’s invoices
B. Vendor’s statements
C. Confirmations of accounts payable balances
D. All of the above

136. Since the audit of accounts payable generally takes a considerable amount of audit time,
effective internal control, properly tested, can significantly reduce audit costs by reducing
A. Analytical procedures C. Tests of details of balances
B. Tests of controls D. Tests of transactions

137. When using confirmations to provide evidence about the completeness assertion for accounts
payable, the appropriate population most likely is
A. Invoices filed in the entity’s open invoice file
B. Vendors with whom the entity has previously done business
C. Amounts recorded in the accounts payable subsidiary ledger
D. Payees of checks drawn in the month subsequent to the balance sheet date

138. The test of details of balances procedures to “trace from account payable list to vendors
invoices and statements” satisfies the objective of
A. Classification C. Detail tie-in
B. Completeness D. Existence

139. The Smith corporation uses pre-numbered receiving reports that are released in numerical
order form. For two days before the count all the receiving reports are stamped “before
inventory”, and for two days after the count all receiving reports are stamped “after
inventory”. The receiving department continues to receive goods after cut-off time while the
physical count is in process. The least efficient method for checking the accuracy of cut-off:
A. Is to observe that the receiving clerk is stamping the receiving reports properly
B. Is to list the number of the last receiving report for items included in the physical
inventory count
 C. Is to test trace receiving reports issued before the receiving report to the physical items
to see they have been included in the physical count
D. Is to test trace receiving reports issued after the last receiving report to the physical items
to see that they have not been included in the physical count

140. The purpose of the audit procedure to “examine underlying documentation for subsequent
cash disbursements” is to
A. Find the documentation relating to cash disbursement
B. Uncover liabilities on the balance sheet which should not have been recorded until a
subsequent period
C. Uncover payments made in a subsequent accounting period that represent liabilities at
the balance sheet date
D. Uncover cash disbursements recorded in a subsequent accounting period which should
be recorded in this period

141. An auditor usually examines receiving reports to support entries in the

A. Check register and sales journal
B. Voucher register and sales journal
C. Sales journal and sales returns journal
D. Voucher register and sales returns journal

142. Failure to record the acquisition of goods received and services received directly affects the
balances in
A. Asset C. Inventory
B. Capital D. Liability

143. In a payables application, checks are authorized and paid based on matching purchase orders,
receiving reports and vendor invoices. Partial payments are common. An appropriate audit
procedure for verifying that a purchase order has not been paid twice is to sort the
A. Receiving report file by vendor invoice amounts and investigate any discrepancies
between the total amounts received and vendor invoice amounts
B. Check register file by purchase order, compute total amounts paid by purchase order,
compare total amounts paid with purchase order amounts, and investigate any
discrepancies between the total amounts paid the purchase order amounts
C. Vendor invoice file by purchase order, compute total amounts invoiced by purchase
order, compare total amounts invoiced with purchase order amounts, and investigate any
discrepancies between the total amounts invoiced and purchase order amounts
D. Receiving report file by purchase order, compute total amounts received by purchase
order, compare total amounts received with purchase order amounts, and investigate any
discrepancies between the total amounts received and purchase order amounts

144. One payroll audit objective is to determine whether the employees received pay in amounts
recorded in the payroll journal. To achieve this objective, the auditor should:
 A. Reconcile the payroll bank account
B. Compare cancelled payroll checks with the payroll journal
C. Requesting that a company official distribute all pay checks
D. Determine whether a proper segregation of duties exits between recording payroll and
reconciling the payroll bank account

145. In auditing payroll, an auditor most likely would

A. Observe entity employees during a payroll distribution
B. Compare payroll costs with entity standards and budgets
C. Verify that checks representing unclaimed wages are mailed
D. Trace individual employee deductions to entity journal entries

146. An entity has leased an asset and appropriately recorded a finance lease because of the
existence of a bargain purchase option. In addition, the entity expressed that it is certain to
exercise the option. The auditor should determine:
A. That the leased property is being depreciated over the lease term
B. That the minimum lease payments include contingent rent and executory costs
C. Whether the interest rate used in computing the present value of the minimum lease
payments is the interest rate implicit in the lease
D. The recorded cost in the lessee’s books is the same as the carrying value of the property
in the books of the lessor immediately before the lease

147. It refers to an approximation of the amount of an item in the absence of a precise means of
measurement
A. Accounting estimate C. Projection
B. Forecast D. Uncertainty

148. Which of the following statements is incorrect about accounting estimate?

A. The risk of material misstatements is greater when accounting estimates are involved
B. Management is responsible for making accounting estimates included in the financial
statements
C. When evaluating accounting estimates, the auditor should pay particular attention to
assumptions that are objective and are consistent with predictable patterns
D. The evidence available to support and accounting estimate will often be more difficult to
obtain and less conclusive than evidence available to support other items in the financial
statements

149. When auditing accounting estimates, the auditor should obtain sufficient appropriate
evidence that the accounting estimates are:
A B C D
Reasonable in the circumstances Yes Yes Yes No
Adequately accounted Yes No Yes Yes
Adequately disclosed Yes Yes No No
150. All of the following procedures are effective in evaluating the reasonableness of the
accounting estimates, except:
A. Review subsequent events which confirm the estimate made
B. Engage the services of an expert to assist in making accounting estimates
C. Use an independent estimate for comparison with that prepared by management
D. Review and test the process used by management to develop accounting estimates

151. When an entity has the ability to control the other entity it exercises significant influence over
the other entity in making financial and operating decisions manifest:
A. Centralized operations C. Related parties
B. Decentralization D. Related services

152. The responsibility for the identification and disclosure of related parties and transactions with
such parties rests with:
A. Audit committee C. Internal auditor
B. External auditor D. Management

153. Which of the following is not one of the primary reasons why auditors should be aware of
related parties and transactions between such parties?
A. GAAP requires disclosure of the related party transactions if they are material
B. A related party transaction may be motivated by other than ordinary business
considerations
C. GAAP requires that related party transactions be accounted for in the same manner as an
arm’s-length transaction
D. The existence of related parties or related party transactions may affect the financial
statements and the reliability of audit evidence

154. The primary concern of the auditor regarding related party transactions is that
A. Their effects are eliminated from the financial statements
B. Their existence and significance be adequately disclosed
C. Their form be emphasized rather than their economic substance
D. They are reported to proper regulatory authorities because they are illegal

155. Which of the following does PAS not identify as a related party?
A. Affiliated companies
B. Line employees of the company
C. Principal owners of the company
D. Members of company management

156. Which of the following auditing procedures is most likely to assist an auditor in identifying
related party transactions?
A. Retesting ineffective control previously reported to the audit committee
B. Sending second request for unanswered positive confirmations of accounts receivable
 C. Inspecting communications with law firms for evidence of unreported contingent
liabilities
D. Reviewing information provided by management identifying related parties and being
alert for other material related party transactions

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

A. A review of SEC filings
B. An inquiry of management
C. A review of the purchases and sales journals for the period under audit
D. An examination of stockholders’ listings to identify principal stockholders

Documentation

158. It refers to the material (working papers) prepared by and for, or obtained and retained by
the auditor in connection with the performance of the audit
A. Accounting data C. Corroborative evidence
B. Audit report D. Documentation

159. What is the overall objective of audit documentation?

A. Defend against claims of deficient audit
B. Provide a basis for reviewing the work subordinates
C. Provide reasonable assurance that the audit was conducted in accordance with PSA
D. None of the above

160. An auditor’s working papers serve mainly to

A. Provide the principal support for the auditor’s report
B. Document the level of independence maintained by the auditor
C. Monitor the effectiveness of the CPA firm’s quality control procedures
D. Satisfy the auditor’s responsibilities concerning the Code of Professional Conduct

161. The primary purpose of audit working papers is to

A. Serve as a means for the preparation of the financial statements
B. Comply with the generally accepted auditing standards in the Philippines
C. Provide evidence of the planning and execution of audit procedures performed
D. Document weaknesses in the internal control with recommendations to management for
improvement

162. Which of the following is not one of the primary purposes of working papers?
A. To substitute the client’s accounting records
B. To assist in the supervision and review of work
C. To assist in planning and performance of the audit
D. To record the audit evidence resulting from audit work performed to support the
auditor’s opinion
163. Which of the following statements is incorrect about the working papers prepared by the
auditor?
A. Working papers should be in the form of data stored on paper
B. The extent of working paper documentation is a matter of professional judgment
C. Working papers should be designed and organized to meet the circumstances and the
auditor’s need for each individual audit
D. The auditor should record in the working papers information on planning the audit work,
the nature, timing and extent of the audit procedures performed, the results thereof, and
the conclusions reached from the audit evidence obtained

164. Which of the following factors would least likely affect the form, content and extent of an
auditor’s working papers?
A. The content of representation letter
B. The audit methodology and tools used
C. The identified risks of material misstatement
D. The significance of the audit evidence obtained

165. The following statements relate to the form and content of working papers. Which is false?
A. Working papers should include documentation of every matter the auditor considers
during the audit
B. The auditor should prepare working papers which are sufficiently complete and detailed
to provide an overall understanding of the audit
C. Working papers should include the auditor’s reasoning on all significant matters which
require the exercise of judgment, together with his/her conclusion thereon
D. The auditor should include in the working papers information on planning the audit work;
the nature, timing and extent of the audit procedures performed and the results of such
procedures; and the conclusions drawn from the audit evidence obtained

166. The permanent files included in the audit documentation includes all, but which of the
following
A. Results of analytical procedures from prior years
B. A copy of the current and prior year’s audit programs
C. Copies of articles of incorporation, by laws and contracts
D. Information related to the understanding of internal control

167. It serves as a set of instructions to assistants involved in the audit and a means to control the
proper execution of the work
A. Audit program
B. Engagement letter
C. Internal control questionnaire
D. Overall audit plan

168. The audit program usually states all four of the choices below, but it always includes the
A. Audit procedures C. Sample sizes
 B. Particular items to select D. Timing of the tests

169. Most audits of a company are done annually by the same CPA firm. Except for initial
engagements, the auditor begins the audit with a great deal of information about the internal
controls developed in prior years. Because systems and controls usually do not change often
A. The auditor can skip the evaluation of this area on repeat engagements
B. This information can be updated and carried forward to the current year’s audit
C. It eases the burden on the auditor’s requirement to do a complete study of the controls
this year
D. It is sufficient for the auditor just to inquire of client whether the controls have been
changed since last year

170. The following statements relate to audit programs. Which statement is true?
A. An audit program would not contain documentation of the system being reviewed
B. The FRSC publishes a standard audit program and encourages the adoption for general
use
C. The audit plan and related program should no longer be changed once the audit is started
D. The preparation of an audit program is not influenced by the state of the client’s internal
control system

Completing the Audit

171. Which of the following is not among the characteristics of the procedures performed in
completing the audit?
A. They are performed after the balance sheet date
B. They involve many subjective judgments by the auditor
C. They are optional since they have only an indirect impact on the opinion to be expressed
D. They are usually performed by audit managers or other senior members of the audit team
who have extensive audit experience

172. After obtaining understanding of the legal and regulatory framework applicable to the client,
the auditor should:
A. Develop a code of conduct and ensure that employees comply with it
B. Perform procedures to help identify instances of non-compliance with laws and
regulations
C. Monitor legal requirements and ensure that operating procedures are designed to meet
these requirements
D. Inquire of management as to the laws or regulations that may be expected to have a
fundamental effect on the operation of the entity

173. To obtain general understanding about the laws and regulations affecting the client’s
business, the auditor would least likely
A. Obtain a lawyer’s representation letter
 B. Inquire of management concerning the entity’s policies and procedures regarding
compliance with laws and regulations
C. Inquire of management as to the laws or regulations that may be expected to have a
fundamental effect on the operations of the entity
D. Discuss with management the policies or procedures adopted for identifying, evaluating
and accounting for litigation claims and assessments

174. Which of the following is not true about the auditor’s consideration of compliance with laws
and regulations?
A. The auditor should obtain sufficient appropriate evidence about compliance with laws
and regulations
B. The auditor should perform procedures to identify instances of non-compliance with laws
and regulations
C. The auditor should obtain a general understanding of legal and regulatory framework
applicable to the entity
D. The auditor should obtain oral representation that management has disclosed to the
auditor all known actual or possible non-compliance with laws and regulations

175. The dollar amount of some misstatements cannot be accurately measured. For example, if
the client were unwilling to disclose an existing lawsuit, the auditor must estimate
A. It’s likely effect on net income
B. It’s likely effect on management’s future decisions
C. It’s likely effect on users of the financial statements
D. It’s likely effect on the auditor’s exposure to lawsuits

176. When litigation or claims have been identified or when the auditor believes they may exist,
the auditor should seek direct communication with the entity’s lawyers. The letter should be
A. Prepared by the auditor, sent by the auditor, and request the lawyer to communicate
directly with the auditor
B. Prepared by the management, sent by auditor, and request the lawyer to communicate
directly with the auditor
C. Prepared by the auditor, sent by the management, and request the lawyer to
communicate directly with the auditor
D. Prepared by management, sent by the auditor, and request the lawyer to communicate
directly with management

177. Auditors sometimes encounter situations in which the outcome of a matter cannot be
reasonably estimated at the time the financial statements are issued. These matters are
referred to as
A. In suspense matters C. Non-sequiturs
B. Inestimatable matters D. Uncertainties

178. By definition, subsequent events for reporting purposes occur after:

A. The balance sheet date
 B. The balance sheet date and the date the report is issued
C. The date the report is approved and the date the report is issued
D. The balance sheet date and but before the date of the auditor’s report

179. “Subsequent events” for reporting purposes are defined as events which occur subsequent
to the
A. Balance sheet date
B. Date of the auditor’s report
C. Balance sheet 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

180. Subsequent events refer to events that occur after the date of the financial statements and
are:
A. Favorable to the entity being audited
B. Unfavorable to the entity being audited
C. Either favorable or unfavorable to the entity being audited
D. Neither favorable nor unfavorable to the entity being audited

181. Which of the following procedures should an auditor generally perform regarding subsequent
events?
A. Reading minutes of directors’ and stockholders’ meeting
B. Review the cut-off bank statements for several months after the year-end
C. Communicate material weaknesses in the internal control structure to the client’s audit
committee
D. Send second request to the client’s customers who failed to respond to initial accounts
receivable on confirmation requests

182. Which of the following procedures would an auditor ordinarily perform during the review of
subsequent events?
A. Read the minutes of the board of directors and shareholder’s meetings
B. A review of the cut-off bank statements for the period after the year-end
C. An analysis of related party transactions for the discovery of possible irregularities
D. An investigation of material weaknesses in internal accounting control previously
communicated to the client

183. Which of the following procedures would an auditor most likely perform to obtain evidence
about an entity’s subsequent events?
A. Review the treasurer’s monthly reports on temporary investments owned, purchase, and
sold
B. Compare the latest available interim financial statements with the financial statements
being audited
C. Examine on a test basis the purchase invoices and receiving reports for serval days after
the inventory date
 D. Reconcile bank activity for the month after the balance sheet date with cash activity
reflected in the accounting records

184. Which of the following procedures should an auditor ordinarily perform regarding subsequent
events?
A. Review the cut-off bank statements for several months after the year-end
B. Communicate material weaknesses in the internal control to the client’s audit committee
C. Compare the latest available interim financial statements with the financial statements
being audited
D. Send second request to the client’s customer who failed to respond to initial accounts
receivable confirmation requests

185. The audit procedures for the subsequent events review can be divided into two categories:
(1) procedures normally integrated as a part of the verification of the year-end account
balances, and (2) those performed specifically for the purpose of discovering subsequent
events. Which of the following procedures are in category 2?
A. Correspond with attorneys
B. Test the collectability of accounts receivable by reviewing subsequent period cash
receipts
C. Subsequent-period sales and purchases transactions are examined to determine whether
the cut-off is accurate
D. Compare the subsequent period purchase price of inventory with the recorded cost as a
test of lower-of-cost-or-market valuation

186. Subsequent events affecting the realization of assets ordinarily will require adjustment of the
financial statements under examination because such events typically represent
A. The culmination of conditions that existed at the balance sheet date
B. The discovery of new conditions occurring in the subsequent events period
C. The final estimates of losses relating to casualties occurring in the subsequent events
period
D. The preliminary estimate of losses relating to new events that occurred subsequent to
the balance sheet date

187. Which of the following events in a subsequent period will normally require adjustment of
financial statements?
A. Purchase of a business
B. Issuance of preferred stock
C. Issuance of long-term bonds
D. Settlement of a provision in excess of recorded amounts

188. Which of the following material events occurring subsequent to the balance sheet date would
require an adjustment to the financial statements before they are issued?
A. Loss of a plant as a result of flood
B. Sale of long-term debt or capital stock
 C. Major purchase of a business which is expected to double sales volume
D. Sale of an equipment for an amount significantly lower than its carrying value

189. The following events all occurred after the balance sheet date (6/30/20) but prior to the
auditor’s report (9/19/20). Which one would require an adjustment to the account balances
as of 6/30/20?
A. Inventory valued at P100,000 on 6/30/20 was destroyed in a fire on 8/1/20
B. Client will market a new series of equity securities (P2 million of preferred stock) on
8/1/20
C. Unused equipment on the books at 6/30/20 for P100,000 was disposed of 7/31/20 for
P60,000
D. Securities costing P30,000 held for temporary investment on 6/30/20 declined in value
by one-third when the market took a plunge on 8/15/20

190. A major customer of an audit client suffers a fire just prior to completion of year-end filed
work. The audit client believes that his event could have a significant direct effect on the
financial statements. The auditor should
A. Disclose the event in the auditor’s report
B. Advise management to adjust the financial statements
C. Ask the client to disclose the event in notes to the financial statements
D. Withhold submission of the auditor’s report until the extent of the direct effect on the
financial statements is known

191. The practice of dual rating is associated with:

A. The subsequent discovery of omitted procedures
B. Subsequent events that occur between the balance sheet date and the report date
C. Subsequent events that occur between the report date and the issuance of the report
D. Subsequent events that occur between the balance sheet date and the issuance of the
report

192. If an auditor dates the auditor’s report on financial statements for the year ended December
31, 20200, as of February 10, 2021, except for Note J, as to which the date is March 3, 2021,
the auditor is taking responsibility for
A. All subsequent events occurring through March 3, 2021
B. All subsequent events occurring through February 10, 2021, only
C. Only the specific subsequent event referred to in Note J through March 3, 2021
D. All subsequent events occurring through February 10, 2021, and the specific subsequent
event referred to in Note J through March 3, 2021

193. Which of the following is least likely a procedure that would be performed by the auditor near
the auditor’s report date?
A. Reading the entity’s latest available interim financial statements
B. Inquiring of the client’s legal counsel concerning litigations and claims
 C. Reviewing the procedures that management has established to ensure that subsequent
events are identified
D. Reading the minutes of the meetings of shareholders, the board of directors and audit
executive committees held throughout the audit year

194. Harvey, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of
subsequent events that may require adjustment or disclosure essential to a fair presentation
of the financial statements in conformity with GAAP. Which of the following procedures
would be least appropriate for this purpose?
A. Read the minutes of the board of directors
B. Obtain a lawyer’s letter as of the completion of fieldwork
C. Inquired of managements concerning events, which may have occurred
D. Confirm as of the completion of fieldwork accounts receivable which have increase
significantly from the year-end date

195. Which of the following audit procedures most likely would assist an auditor in identifying
conditions and events that may indicate substantial doubt about an entity’s ability to continue
as a going concern?
A. Inspecting title documents to verify whether any assets are pledged as collateral
B. Confirming with third parties the details of arrangements to maintain financial support
C. Comparing the entity’s depreciation and asset capitalization policies to other entities in
the industry
D. Reconciling the cash balance per books with the cut-off bank statement and the bank
confirmation

196. When conditions and events have been identified which may cause significant doubt on the
entity’s ability to continue as a going concern, the auditor should consider performing the
following procedures except
A. Express a report that contains a disclaimer of opinion
B. Review management plans for future actions based on going concern assessment
C. Seek written representations from management regarding its plans for future actions
D. Gather sufficient appropriate evidence to confirm or dispel whether or not a material
uncertainty exists by carrying out procedures such as considering the effect of
management plans and other mitigating factors

197. Which of the following may not cause significant doubt about the going concern assumption
of an entity?
A. Non-compliance with capital or other statutory requirements
B. Changes in legislation or government policy expected to adversely affect the entity
C. The entity heavily used long term capital in financing its investment in permanent assets
D. Pending legal or regulatory proceeding against the entity that may, if successful, result in
claims that are unlikely to be satisfied
 198. If, on the basis of the additional procedures carried out and the information obtained,
including the effect of mitigating circumstances, the auditor’s judgment is that the entity will
not be able to continue as a going concern, the financial statements should be prepared using
an appropriate basis; otherwise the auditor will issue a(n)
A. Adverse opinion
B. Qualified opinion
C. Disclaimer of opinion
D. Unqualified opinion with emphasis of a matter paragraph

199. An auditor is obliged to communicate a proposed audit adjustment to an entity’s audit

committee only if the adjustment:
A. Has a significant effect on the entity’s financial reporting process
B. Results from correction of a prior period’s departure from GAAP
C. Has not been recorded before the end of the auditor’s field work
D. Is a recurring matter that was proposed to management in the prior year

Representation Letter

200. Written representation can take the following forms except

A. Engagement letter
B. A representation letter
C. Relevant minutes of meetings or signed financial statements
D. A letter prepared by the auditor outlining the auditor’s understanding of management’s
representation, duly acknowledged and confirmed by management

201. When considering the use of management’s written representations as audit evidence about
the completeness assertion, an auditor should understand that such representations:
A. Are not parts of the evidential matter considered to support the assertion
B. Complement, but do not replace, substantive test designed to support the assertion
C. Replace reliance on internal accounting controls as evidence to support the assertion
D. Constitute sufficient evidence to support the assertion when considered in combination
with reliance on internal accounting controls

202. A representation letter issued by a client:

A. Is a substitute for testing
B. Does not reduce the auditor’s responsibility
C. Is essential for the preparation of the audit program
D. Reduces the auditor’s responsibility only to the extent that it is relied upon

203. Which of the following statements does not properly describe the auditor’s use of
management’s representation as audit evidence?
A. In certain instances, a representation by management may be the only evidence which
can be expected to be available
 B. Representations by management are substitute for audit evidence that the auditor could
reasonably expect to be available
C. Written representations requested from management may be limited to matters that are
considered either individually or collectively material to the financial statements
D. If specific management representation is contradicted by other audit evidence, the
auditor should investigate the circumstances, and when necessary reconsider the
reliability of other management representations

204. To which of the following matters would materiality limits not apply in obtaining written
management representations?
A. Reductions of obsolete inventory to net realizable value
B. The availability of minutes of stockholder’s and director’s meeting
C. Losses from purchase commitments at prices in excess of market value
D. The disclosure of compensating balance arrangements involving related parties

205. Which of the following expressions is least likely to be included in a client’s representation
letter?
A. Management has made available all financial statements and the related data
B. Management acknowledges responsibility for illegal actions committed by employees
C. No events have occurred subsequent to the balance sheet date that require adjustment
to, or disclosure in, the financial statements
D. The company has complied with all aspects of contractual agreements that would have a
material effect on the financial statements in the event of non-compliance

206. Management’s refusal to furnish a written representation letter on a matter which the
auditor considers essential constitutes
A. A violation of the foreign corrupt practices act
B. An uncertainty sufficient to preclude an unqualified opinion
C. A scope limitation sufficient to preclude an unqualified opinion
D. Prima facie evidence that the financial statements are not presented fairly

Post-Audit Responsibilities

207. After issuance of the auditor’s report, the auditor has not obligation to make any further
inquiries with respect to audited financial statements covered by an auditor’s report unless a
A. Contingency is resolved
B. Material defalcation ensues
C. History of significant non-arms-length related party transactions is discovered
D. Development occurs which may affect the client’s ability to continue as going concern

208. After issuing a report, an auditor has no obligation to make continuing inquiries or perform
other procedures concerning the audited financial statements, unless
A. Management of the entity requests the auditor to reissue the auditor’s report
 B. Information, which exited at the report date and may affect the report, comes to the
auditor’s attention
C. Information about an event that occurred after the end of the fieldwork comes to the
auditor’s attention
D. Final determinations or resolutions are made of contingencies that had been disclosed in
the financial statements

209. 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 subsidiary is sold that accounts for 25% of the entity’s consolidated net income
B. A contingency is resolved that had been disclosed in the audited financial statements
C. New information is discovered concerning undisclosed lease transactions of the audited
period
D. An uninsured natural disaster occurs that may affect the entity’s ability to continue as a
going concern

210. 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. The entity’s sale of subsidiary that accounts for 30% of the entity’s consolidated sales
B. The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report
C. A technological development that could affect the entity’s future ability to continue as a
going concern
D. The discovery of information regarding a contingency that existed before the financial
statements were issued

211. After issuing a report an auditor concludes that an auditing procedure considered necessary
at the same time of the examination was omitted from the examination. The auditor should
first
A. Notify the audit committee or the board of director’s that the auditor’s opinion can no
longer be relied upon
B. Undertake to apply the omitted procedure or alternative procedures that would provide
a satisfactory basis for the auditor’s opinion
C. Review the results of other procedures that were applied to compensate for the one
omitted or to make its omission less important
D. Assess the importance of the omitted procedure to the auditor’s ability to support the
opinion expressed on the financial statements taken as a whole

212. An auditor concludes that the omission of a substantive procedure considered necessary at
the time of the examination may impar the auditor’s present ability to support the previously
expressed opinion. The auditor need not apply the procedure if
A. The risk of adverse publicity or litigation is low
B. The auditor’s opinion was qualified because of a departure from PFRS
 C. The results of other procedures that were applied tend to compensate for the procedure
omitted
D. The results of subsequent period’s tests of controls make the omitted procedure less
important

213. On March 15, 2021, Kent, CPA, issued an unqualified opinion on a client’s audited financial
statements for the year ended December 31, 2020. On May 4, 2021, Kent’s internal inspection
program disclosed that engagement personnel failed to observe the client’s physical
inventory. Omission of this procedure impairs Kent’s present ability to support the unqualified
opinion. If the stockholders are currently relying on the opinion, Kent should first
A. Reissue the auditor’s report and add an explanation paragraph describing the departure
from PSA
B. Advice management to disclose to the stockholders that Kent’s unqualified opinion
should not be relied on
C. Undertake to apply alternative procedures that would provide a satisfactory basis for the
unqualified opinion
D. Compensate for the omitted procedure by performing tests of controls to reduce audit
risk to sufficiently low level

214. An auditor concludes that a substantive auditing procedure considered necessary during the
prior period’s audit was omitted. Which of the following factors would most likely cause the
auditor promptly to apply the omitted procedure?
A. The auditor’s opinion on the prior period’s financial statements was unqualified
B. The source documents needed to perform the omitted procedure are still available
C. There are no alternative procedures available to provide the same evidence as the
omitted procedure
D. The omission of the procedure impairs the auditor’s present ability to support the
previously expressed opinion

215. Subsequent to the issuance of the auditor’s report, the auditor became aware of the facts
existing at the report date that would have affected the report had the auditor then been
aware of such facts. After determining that the information is reliable, the auditor should next
A. Issue revised pro forma financial statements taking into consideration the newly
discovered information
B. Notify the board of directors that the auditor’s report must no longer be associated with
the financial statements
C. Determine whether there are persons relying or likely to rely on the financial statements
who would attach importance to the information
D. Request that management disclose the effects of the newly discovered information by
adding a footnote to subsequently issued financial statements

216. When an investigation of the discovery of facts existing at the report date confirms the
existence of the fact and the auditor believes the information is important to those relying or
likely to rely on the financial statements, the auditor should immediately:
 A. Resign from the engagement
B. Notify the SEC or other regulatory agency
C. Take steps to prevent future reliance on the audit report
D. Take no action since the auditor is not responsible for such matters

217. When a CPA has concluded that action should be taken to prevent future reliance on his
report, he should
A. Recall the financial statements and issue revised statements and include an appropriate
opinion
B. Recall the financial statements and issue a disclaimer of opinion which should generally
be followed by revised statements and a qualified 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 period
D. Advise his client to make appropriate disclosure of the newly discovered facts and their
impact on the financial statements to persons who are known to be currently relying or
who are likely to rely on the financial statements and the related auditor’s report

218. Several months after an unmodified report was issued, the auditor discovers the financial
statements were materially misstated. The client’s chief executive officer agrees that the
statements are misstated, but refuses to issue a correction, and claims that “confidentiality”
prevents the CPA from performing anyone
A. CEO is correct. Auditor must maintain confidentiality
B. CEO is wrong. But since the auditor’s report is issued, it is too late to retract
C. CEO is wrong, and the auditor has an obligation to issue a revised correct audit report,
even if CEO will not revise or correct the financial statements
D. CEO is correct. But to be ethically correct the auditor should violate the confidentiality
rue and disclose the error
 Audit Sampling

Basic concepts

1. When the auditor decides to select less than 100 percent of the population for testing, the auditor
is said to be using
A. Audit sampling C. Representative sampling
B. Poor judgment D. None of the above

2. It involves the application of audit procedures to less than 100% of items within an account
balance or class of transactions to be able to draw conclusions about the characteristics of the
entire population
A. Audit sampling C. Random testing
B. Incomplete tests D. Selective testing

3. For a given audit procedure, the evidence obtained from a sample of 200 would ordinarily be
A. Less sufficient than from a sample of one hundred
B. More sufficient than from a sample of one hundred
C. Less competent than from a sample of one hundred
D. More competent than from a sample of one hundred

4. Sampling risk is
A. The risk that an auditor reaches an incorrect conclusion because the sample is not a
representative of the population
B. The risk that an auditor reaches the correct conclusion after considering the non-sampling
risk introduced by auditor judgement
C. A and B
D. Neither A nor B

5. Sampling risk may be controlled by

A. Adjusting the sample size
B. Always using random sampling
C. Using whatever sample selection technique is appropriate for the population
D. A and C

6. The auditor’s failure to recognize an error in an amount or an error in an internal control data
processing procedure is described as:
A. Non-sampling error C. Standard error of the mean
B. Sampling error D. Statistical error

7. Non-sampling errors occur when the audit tests do not uncover existing exceptions in the:
A. Financial statements C. Population
B. Planning stage D. Sample
8. 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. Anomalous error C. Sampling error
B. Non-sampling error D. Tolerable error

9. Which of the following statements is correct?

A. The auditor’s failure to recognize an exception is a significant cause of sampling risk
B. The use of inappropriate audit procedures is a significant cause of non-sampling risk
C. The use of an appropriate sample selection technique ensures a representative sample
D. A sample of all items of a population will eliminate sampling risk, but increase non-sampling
risk

10. This refers to the mathematical completeness of sampling risk

A. Assurance error C. Expected error
B. Confidence levels D. Tolerable levels

11. Principal methods of sampling selection include all of the following except
A. Haphazard C. Statistical
B. Random number D. Systematic

12. When using statistical sampling, which of the following need not be known to evaluate the results
of an attribute sample?
A. Number of deviations in the population
B. Number of deviations in the sample
C. Risk of assessing control risk too low
D. Sample size

13. Which of the following statements is a valid criticism of the use of non-statistical sampling
methods?
A. The cost of performing random selection of testing often exceeds the benefits
B. Non-statistical sampling does not differ substantially from statistical sampling method
C. Many audit tests, such as footing of journals, must be performed outside a statistical context
D. Conclusion may be drawn in more precise ways when using statistical sampling methods

14. Which of the following statements is true?

A. The audit procedures will vary as a result of using either statistical or non-statistical sampling
B. The same audit procedures are performed in the same manner for either statistical or non-
statistical sampling
C. The audit procedures will be the same for either statistical or non-sampling, but they must be
performed differently for each
D. Statistical sampling requires quantitative audit procedures, whereas non-statistical sampling
requires judgmental audit procedures

15. Which of the following statements is NOT correct?

 A. It is acceptable for auditors to use statistical sampling methods
B. It is acceptable for auditors to use non-statistical sampling methods
C. The primary benefit of statistical sampling methods is the quantification of sampling risk
D. An advantage of using statistical sampling is that the cost/benefit ratio is always positive

16. A method of sampling selection that involves selecting a group of contiguous items from within
the population is called
A. Block selection C. Systematic selection
B. Stratified selection D. Value-weighted selection

17. When an auditor intends to evaluated a sample statistically, the only acceptable selection method
is:
A. Block selection C. Judgmental selection
B. Haphazard selection D. Probabilistic selection

18. Which following statements regarding replacement and non-replacement sampling is NOT true?
A. Auditors rarely use replacement sampling
B. In non-replacement sampling, an element in the population can be included in the sample
only once
C. In replacement sampling, an element in the population will not be included in the sample
more than once
D. If the random number corresponding to an element is selected more than once in non-
replacement sampling, it is treated as a discard the second time

19. When selecting a stratified sample, the sample size is

A. Always larger than if unstratified sampling had been used
B. Determined for each stratum and selected from that stratum
C. Determined for the unstratified population and then apportioned to each stratum
D. Determined for each stratum and selected randomly from the entire unstratified population

20. In systematic selection, the number of sampling units in the population is divided by the sample
size to determine the
A. Sampling risk
B. Non-sampling risk
C. Sampling interval
D. Pattern that may exist in the population

21. Audit efficiency may be improved when the sampling unit is defined as the individual monetary
units that comprise the population. The technique is called
A. Random selection
B. Stratification
C. Systematic selection
D. Value-weighted selection
 22. Which of the following statements regarding documentation of the sample selection process is
NOT true?
A. Regardless of the method used in selecting a random sample, it is necessary to have proper
documentation
B. Minimum documentation would include sufficient information to permit the reproduction of
the sample at a later date
C. For documentation, it is permissible for the auditor to include in the working papers a copy
of the table used, with random numbers identified
D. When comparing statistical sampling to judgmental sampling, it is more important that
statistical sampling be properly documented because of its mathematical nature

Attribute sampling

23. A statistical method used to estimate the proportion of items in a population containing a
characteristic of interest is
A. Attributes sampling
B. Variables sampling
C. Estimation sampling
D. Population-proportional-to-size sampling

24. Place the following steps in their proper order:

1. Analyze exception
2. Select the sample
3. Define attributes and exception conditions
4. State the objectives of the audit test
5. Define the sampling unit

A. 1, 2, 3, 4, 5 C. 4, 3, 1, 2, 5
B. 1, 3, 2, 4, 5 D. 4, 3, 5, 2, 1

25. Audit sampling for test of control is generally appropriate when

A. Control leaves evidence of performance
B. Control leaves no evidence of performance
C. Either a or b
D. Neither a or b

26. Unless a precise statement of what constitutes an attribute is made in advance, the staff person
who performs the audit procedure will have no guidelines
A. For identifying deviations
B. For performing all three of the above
C. To use when evaluating the results of analytical review procedures
D. To determine what documents to obtain and review for the observation tests

27. Tolerable error means

 A. An error that the auditor expects to be present in the population
B. The maximum error in a population that the auditor is willing to accept
C. 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
D. The possibility that the auditor’s conclusion, based on a sample may be different from the
conclusion reached if the entire population were subjected to the same audit procedure

28. The auditor’s best estimate of the population exception rate is the
A. Sample exception rate
B. Tolerable exception rate (TER)
C. Experience of the previous year
D. Computed upper exception rate (CUER)

29. If an auditor, without statistical sampling, selects a sample of one hundred items from a
population and finds two exceptions, the auditor
A. Can conclude that the sample exception rate is 2%
B. Can conclude that the population exception is 2%
C. Can calculate the highest exception rate expected in the population
D. Cannot make any conclusions about either the sample or the population

30. The highest estimated exception rate in the population at a given acceptable risk of assessing
control risk too low is
A. Estimated population exception rate
B. The computed upper exception rate
C. The tolerable exception rate
D. The upper exception rate

31. Before the population can be considered acceptable based on the acceptable risk of assessing
control risk too low (ARACR), the computed upper exception rate (CUER) must be
A. Less than the tolerable exception rate
B. Greater than the tolerable exception rate
C. Less than or equal to the tolerable exception rate
D. Greater then or equal to the tolerable exception rate

32. The tolerable exception rate (TER) has a significant effect on sample size. The relationship of TER
to a sample size is
A. Not determinable
B. Direct (larger TER=larger sample)
C. Inverse (larger TER=smaller sample)
D. Variable (sometimes larger, sometimes smaller)

33. Which of the following factors is generally not considered in determining sample size for a test of
controls?
A. Population size
 B. Tolerable exception rate
C. Expected population exception rate
D. Risk of assessing control risk is too low

34. In planning a statistical sample for a test of controls, an auditor increased the expected population
deviation rate (EDR) 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. Sample size
B. Tolerable deviation rate
C. Allowance for sampling risk
D. Risk of assessing control risk too low

35. When using statistical sampling, the auditor would probably require a smaller sample if the
A. Population increases
B. Desired reliability decreases
C. Desired precision interval narrows
D. Expected exception rate increases

36. Increase in the planned allowance for sampling risk have what effect on required sample size?
A. Decreases C. Indeterminate
B. Increases D. No effect

37. If an auditor tested 50 transactions and found two deviations from an important control
procedure, the auditor could conclude from this test that the:
A. Tolerable rate is 0.4
B. Sample had two deviations
C. Critical rate of occurrence is 0.04
D. Expected population deviation rate is 0.4

38. When audit procedures have been completed for an attributes sampling application, the auditor
must generalize from the sample to the population. Which of the following statements would be
incorrect regarding this process?
A. The computed upper exception rate is the highest exception rate at a given acceptable risk
B. The auditor would use an attributes sampling table to determine the computed upper
exception rate
C. It would be wrong for the auditor to conclude that the population exception rate is exactly
the same as exception rate
D. In selecting the table corresponding to the risk of overreliance, it should be the same as the
ARACR used for determining the initial sample size

39. Which of the following statements is correct concerning statistical sampling in tests of controls?
A. As the population size increase, the sample size should increase proportionately
B. In determining the tolerable rate, an auditor considers detection risk and the sample size
 C. There is an inverse relationship between the expected population deviation rate and the
sample size
D. Deviations from specific control activities at a given rate ordinarily result in misstatements at
a lower rate

Variable sampling

40. While performing a substantive tests of details during an audit, the auditor determined that the
sample result 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. Assessing control risk too high C. Incorrect acceptance
B. Assessing control risk too low D. Incorrect rejection

41. When the auditor’s objective is to test for overstatement of accounts payable, the population
could be defined as
A. Accounts payable listing C. Unpaid invoice
B. Receiving report D. Vendor’s statement

42. The variables sampling method which generally results in smaller sample size than any other
method is:
A. Difference estimation C. Peso-unit sampling
B. Mean per unit estimation D. Ration estimation

43. In a probability-proportional-to-size (PPS) sample, all population physical audit units with an
amount equal to or greater than the amount of the interval will automatically be included in the
sample if the auditor uses
A. Block selection C. Stratified selection
B. Random selection D. Systematic selection

44. In which sampling method is the probability of selection of an item proportional to the size or the
value of the item (e.g., a P1,000 item is 10 times more likely to be selected than a P100 item)?
A. Discovery sampling C. Stratified sampling
B. Ratio estimation D. Value-weighted sampling

45. A type of value weighted selection in which sample size, selection and evaluation results in a
conclusion in monetary amounts
A. Financial sampling C. Random sampling
B. Monetary unit sampling D. Stratified sampling

46. GQ, CPA audited the May Company accounts receivable with a book value of P3,000,000 and
4,400 accounts. In a sample of 400 accounts, GQ found P13,200 understatement errors. The
projected likely misstatement for the sample is:
A. P13,200 C. P272,727
B. P145,200 D. 435,600
Audit in a CIS Environment

Basic EDP Concepts

47. The purpose of an entity’s accounting information and communication system is to __________
A. Capture transactions
B. Monitor transactions
C. Record and process transactions
D. A and C Only

48. The characteristics that distinguish computer processing from manual processing include the
following
I. Computer processing uniformly subjects like transactions to the same instructions
II. Computer system always ensure that complete transaction trails useful for audit purposes are
preserved for indefinite periods
III. Computer processing virtually eliminates the occurrence of clerical errors normally associated
with manual processing
IV. Control procedures as to segregation of functions may no longer be necessary in computer
environment
A. Only statements (1) and (3) are true
B. Only statements (2) and (4) are true
C. All of the above statements are true
D. All of the above statements are false

49. Which of the following is unique to EDP systems?

A. Error listing C. Pre-numbered documents
B. Flowcharts D. Questionnaires

50. A manufacturer of complex electronic equipment such as oscilloscopes has been shipping its
products with thick paper manuals but wants to reduce the cost of producing and shipping this
documentation. The best medium for the manufacturer to use to accomplish this is
A. Compact disc/read-only memory
B. Computer output-to-microfilm
C. Digital audio tape
D. Write once, read many

51. Which of the following represents a type of applications software that a large client is most likely
to use?
A. Central processing unit C. Operating system
B. Enterprise resource planning D. Value-added network

52. In a computerized system, procedure or problem-oriented language is converted to machine

language through:
 A. A verifier C. A converter
B. A complier D. An interpreter

53. There are two common types of workstations – general purpose terminals and special purpose
terminals. Which of the following is not a general-purpose terminal?
A. Basic keyboard and monitor C. Personal computers
B. Intelligent terminals D. Point of sale devices

54. Errors in data processed in a batch computer system may not be detected immediately because
A. There are time delays in processing transactions in a batch system
B. Random errors are most likely in a batch system than in an online system
C. Errors in some transactions cause rejection of other transactions in the batch
D. Transactions trails in batch systems are available only for a limited period of time

55. These are computer systems that enable users to access data and programs directly through
workstations:
A. In-line computer systems
B. On-line computer systems
C. Personal computer environment
D. Transaction processing systems

56. These are economical yet powerful self-contained general-purpose computers

A. Cray II Supercomputer
B. Personal computers or PCs
C. RISOgraph photocopy machines
D. Pentium computers and multimedia station

57. The following are common characteristics of personal computers, except:

A. Relatively inexpensive
B. Portability (small enough to be transportable)
C. Must be configured for a long time before use
D. Provide users with substantial computing capabilities

58. A personal computer can be used in any of the following configurations, except:
A. A workstation connected to a server
B. A server connected to another server
C. A workstation which is part of a local area network of personal computers
D. A stand-alone workstation operated by a single user or a number of users at the different
times

59. When personal computers are accessible to many users, the concern is on the risk relating to
A. Alteration C. Custody
B. Authorization D. Recording
60. Management can contribute to the effective operation of stand-alone computers by prescribing
and enforcing policies for their control and use, such as policies for:
A. Management responsibilities
B. Training requirements and personal usage policies
C. Standards of report format and report distribution controls
D. All of the answers

61. This refers to a collection of data that is shared and used by a number of different users for
different purposes
A. Database C. Master file
B. Information file D. Transaction file

62. A database management system

A. Physically stores each element of data only once
B. Allows quick retrieval of data, but it needs to update filed continually
C. Allows quick retrieval of data but at a cost of inefficient use of file space
D. Stores same data on different files for different purposes, but always knows where they are
how to retrieve them

63. Which two important characteristics distinguish database systems?

A. Data integrity and user integrity
B. Data independence and data sharing
C. Data integrity and data independence
D. Data sharing and data interconnection

64. A software within the database management system which is required to keep track of the
location of data in the database
A. Data dictionary C. Data tracker
B. Data discussion D. Documentation dictionary

65. User access to the various elements of a database may be control through the use of passwords.
These restrictions apply to
A. Individuals, terminal devices and programs
B. Individuals but not to terminal devices and not to programs
C. Programs but not to individuals and not to terminal devices
D. Terminal devices but not to individuals and not to programs

66. These controls require a database administrator to assign security attributes to data that cannot
be changed by database users:
A. Discretionary access controls C. Mandatory access controls
B. Distributed access controls D. Password controls

67. These controls allow user to specify who can access data they own and what action privileges they
have with respect to that data
 A. Discretionary access controls C. Mandatory access controls
B. Distributed access controls D. Password controls

68. This is an arrangement where two or more personal computers are linked together through the
use of special software communication lines. This may also be referred to as a distributed system
A. Local area network C. Wide area network
B. Unit to unit workstation D. World Wide Web

69. Which of the following statements is correct regarding the Internet as a commercially viable
network?
A. Organizations must use firewalls if they wish to maintain security over internal data
B. Companies must apply to the Internet to gain permission to create a homepage to engage in
electronic commerce
C. Companies that wish to engage in electronic commerce on the Internet must meet required
security standards established by the coalition of Internet providers
D. All of the above

70. The electronic transmission of documents between organizations in machine-readable form

A. Computer processing
B. Cryptography
C. Electronic data interchange
D. Short messaging service

71. A combination of hardware and software that protects a WAN, LAN or PC from unauthorized
access through the Internet and from the introduction of unauthorized or harmful software, data
or other material in electronic form
A. Access monitor C. Firewall
B. Anti-virus program D. Security update

72. This is the individual responsible in preparing specifications for the systems to guide programmer,
and writes procedures and user instructions
A. IT control group supervisor C. Systems analyst
B. Network administrator D. None of these

73. This is the individual responsible for the development and management of data communication
systems and reviews documentation to ensure compliance with standards and provides approval
of documentation when standards are met
A. IT control group C. Systems analyst
B. Network administrator D. None of these

74. A computer programmer has written program for updating perpetual inventory records.
Responsibility for initial testing (debugging) of the program should be assigned to the:
A. Internal audit control group C. Machine operator
B. IT department control group D. Programmer
 75. When erroneous data are detected by computer program controls, such data may be excluded
from processing and printed on an error report. Who should review and follow-up this error
report?
A. Computer operator C. Data control group
B. Computer programmer D. System analyst

Internal Control in an EDP System

76. The users of computer in data processing systems frequently eliminates the basic internal control
of:
A. Information processing
B. Cost should not exceed benefit
C. Appropriate segregation of duties
D. Using vouchers for authorization of disbursements

77. Which of the following is not a benefit of using IT based controls?

A. Over-reliance on computer generated reports
B. Ability to process large volumes of transactions
C. Ability to replace manual controls with computer-based controls
D. Reduction in misstatements due to consistent processing of transactions

78. Parity check, read after write checks and duplicate circuity checks are IT controls that are designed
to detect:
A. Illogical uses of hardware
B. Illogical programming commands
C. Erroneous internal handling of data
D. Lack of sufficient documentation for computer processes

79. More than one file may be stored on a single magnetic memory disk. Several programs may be in
the core storage unit simultaneously. In both cases it is important to prevent the mixing of data.
One way to do this is:
A. To use Boundary protection C. To use Interleaving
B. To use File integrity control D. To use Paging

80. The policies and procedures that the entity implements and the IT infrastructure (hardware,
operating systems, etc.) and application software that it uses to support business operations and
achieve business strategies
A. Application controls C. Internal control
B. General controls D. IT environment

81. In comparing the control environment in complex versus non-complex IT systems, the control
environment in complex IT systems is:
A. More controls because there is a greater potential for errors and irregularities
 B. Less critical because the complexity ensures that controls will be built into the system
C. Less critical because non-experts do not have the opportunity to interact with the system and
mess it up
D. More critical because of the high degree of technical competence needed

82. Which of the following terms best describes the type of control evidenced by a segregation of
duties between computer programmers and computer operators?
A. Applications control
B. Hardware control
C. Organizational control
D. Systems development control

83. Internal controls in an on-line computer system include the following:

A. Access controls
B. Transactions logs
C. Controls over Use IDs and passwords
D. All of these

84. Which of the following is not a general control?

A. Reasonableness test for unit selling price of a sale
B. Equipment failure causes error messages on monitor
C. Separation of duties between programmer and operators
D. Adequate program run instructions for operating the computer

85. Reports that are designed to create an audit trail for each on-line transaction. Such reports often
document the source of a transaction (terminal, time and user) as well as the transaction’s details
A. Batch processing logs C. Transaction logs
B. Embedded audit modules D. Transmittal sheets

86. Which of the following is not a major reason why an accounting audit trail should be maintained
for a computer system?
A. Analytical procedures C. Monitoring purposes
B. Deterrent to irregularities D. Query answering

87. Input documents are typically the responsibility of the:

A. Accounting department which prepares and records them
B. Computer department since they will have to be responsible for inputting them
C. User department that transmits the documents to accounting before processing
D. Production and quality control department to see that they are prepared properly

88. These are procedures designed to restrict access to on-line terminal devices, programs and data
A. Access controls C. User authentication
B. General IT controls D. User authorization
89. This access control typically attends to identify a user through unique logon identification,
passwords, access cards or biometric data
A. Access controls C. User authentication
B. General IT controls D. User authorization

90. User authorization procedures are designed to prevent or detect the following, except:
A. Entry of authorized transactions
B. Unauthorized changes to data files
C. Unauthorized access to on-line terminal devices, programs and data
D. The use of computer programs by unauthorized personnel and the use of computer programs
that have not been authorized

91. The following, except one, are internal control techniques which can be used for data and
program security:
A. Employing passwords
B. Disconnecting from the office work
C. Using anti-virus software programs
D. Segregating data info files organized under separate file directories

92. Which of the following statement is incorrect?

A. It may be more efficient to review the design of the general CIS controls before reviewing the
CIS application controls
B. If general CIS controls are not effective, there may be a risk that misstatements might occur
and go undetected in the application systems
C. The purpose of general CIS controls is to establish a framework of overall control over the CIS
activities and to provide an absolute level of assurance that the overall objectives of internal
control are achieved
D. The purpose of CIS application control is to establish specific control procedures over the
application systems in order to provide reasonable assurance that all transactions are
authorized and recorded, and are processed accurately on a timely basis

93. Which of the following statements about general controls is not correct?
A. The chief information officer should report to senior management and the board
B. Successful IT development efforts require the involvement of IT and non-IT personnel
C. Programmers should have access to computer operations to aid users in resolving problems
D. Backup and disaster recover plans should identify alternative hardware to process company
data

94. Which of the following is not an application control?

A. Preprocessing authorization of sales transaction
B. Reasonableness test for unit selling price of sale
C. Separation of duties between computer programmer and operators
D. Post-processing review of sales transactions by the sales department
95. Which of the following statements related to application controls is correct?
A. Application controls relate to all aspects of the IT function
B. Application controls relate to the processing of individual transactions
C. Application controls relate to various aspects of the IT function including software acquisition
and the process of transactions
D. Application control relate to various aspects of the IT function including physical security and
the processing of transactions in various cycles

96. The purpose of input controls is to ensure the:

A. Authorization of access to data files
B. Authorization of access to program files
C. Completeness, accuracy and validity of input
D. Completeness, accuracy and validity of update

97. These are programmed routines that check the input data and processing results for
completeness, accuracy and reasonableness
A. Cut-off procedures
B. Master file controls
C. Pre-processing authorization
D. Edit, reasonableness and validation controls

98. Procedures designed to prevent or detect improper changes to computer programs that are
accessed through on-line terminal devices
A. Edit checks C. Limit checks
B. IT application controls D Programming controls

99. A receiving clerk keyed in a shipment from a remote terminal and inadvertently omitted the
purchase order number. Which of the following controls would most likely detect this error?
A. Compatibility check C. Reasonable check
B. Completeness check D. Sequence check

100. A company uses the account code 614 for maintenance expense. However, one of the
company clerks often codes maintenance expense as 641. The highest account code in the
system is 620. What would be the best internal control check to build into the company’s
computer system to detect this error?
A. A manual re-check of the code C. Valid-character test
B. Sequence check D. Valid-code test

101. This is the process of establishing control totals over data being submitted for processing
through workstations and comparing the control totals during and after processing to ensure
that complete and accurate data are transferred to each processing phase:
A. Balancing C. Footing
B. Cross-casting D. Posting
102. In a CIS environment, which of the following is not a control objective, associated with
processing controls?
A. Processing is complete
B. Transactions are authorized
C. All changes to computer records are accurate
D. Access to computer files is limited to authorized personnel

103. Controls over output are not designed to assure that data generated by the computer are
A. Accurate
B. Relevant
C. Complete
D. Distributed only to authorized personnel

104. The most important output control is

A. Logic tests which verify that no mistakes were made in processing
B. Control totals which are used to verify that the computer’s results are correct
C. Review of the data for reasonableness by someone who knows what the output should
look like
D. Distribution control which assures that only authorized personnel receives the reports
generated by the system

105. During one processing run, several transactions have been rejected by the IT system.
Accordingly, the IT department:
A. It is not responsible for the resolution of rejected transactions
B. Should contract the user departments and inform them of the rejection
C. Should re-encode the inputs previously made by the computer operators and re-process
the transactions
D. Is responsible for ensuring that these transactions are in fact resubmitted and re-entered
for processing

106. The total of the individual account balances in the accounts receivable master files equals the
A. Total sales for the period
B. Balance of the sales account in the general ledger
C. Total sales less the total cash received for the period
D. Balance of the accounts receivable account in the general ledger

107. When posting the sales journal, details of the journal are posted “x” and journal total are
posted to “y”
A. X = the sales account Y = the general ledger
B. X = the accounts receivable the master file Y = the general ledger
C. X = the sales account Y = the accounts receivable subsidiary ledger
D. X = the accounts receivable account in general ledger Y = the sales account in the general
ledger
 108. An entity installed antivirus software on all its personal computers. The software was
designed to prevent initial infections, stop replication attempts, direct infections after their
occurrence, mark affected system components, and remove viruses from infected
components. The major risk in relying on antivirus software is that it may
A. Not detect certain viruses
B. Interfere with system operations
C. Consume too many system resources
D. Make software installation too complex

109. An entity’s contingency plans for computer information systems should include appropriate
backup agreements. Which of the following arrangements would be considered to vendor-
dependent when vital operations require almost immediate availability of computer
resources?
A. A “hot site” arrangement
B. A “cold site” arrangement
C. A “cold and hot site” arrangement
D. Using excess capacity at another data center within the entity

Study & Evaluation of EDP Controls

110. When the IT system is significant, the auditor should also obtain an understanding of the IT
environment and whether it may influence the assessment of
A. Control and detection risks
B. General and application controls
C. Inherent and control risks
D. Inherent and detection risks

111. It relates to materiality of the financial statement assertions affected by the computer
processing
A. Complexity C. Significance
B. Relevance D. Threshold

112. The two requirements crucial to achieving audit efficiency and effectiveness with a personal
computer are selecting:
A. The appropriate audit tasks for personal computer application and the appropriate
software to perform the selected audit tasks
B. The appropriate software to perform the selected audit tasks and data that can be
accessed by the auditor’s personal computer
C. Company data that can be accessed by the auditor’s personal computer and the
appropriate audit tasks for personal computer applications
D. The appropriate sample of company data to test with the auditor’s personal computer
and the appropriate software to perform the selected audit tasks
 113. S1: In a personal computer environment, it may not be practicable or cost-effective for
management to implement sufficient controls to reduce the risks of undetected errors to
a minimum level
S2: The auditor may often assume that control risk is high in personal computer environments
with insufficient internal controls

A B C D
S1 True True False False
S2 True False True False

Understanding EDP Control

114. Involves tracing a few transactions through the accounting system

A. Analytical procedures C. Test of controls
B. Substantive procedures D. Walk-through test

Risk assessment

115. An important characteristic of IT is uniformity of processing. Therefore, a risk exists that

A. Auditors will not be able to access data quickly
B. Auditors will not be able to determine if data is processed consistently
C. Erroneous processing can result in the accumulation of a great number of misstatements
in a short period of time
D. All of the above

116. Which of the following is not a risk specific to IT environments?

A. Increased human involvement
B. Reduced segregation of duties
C. Loss of data due to insufficient backup
D. Reliance on the functioning capabilities of hardware and software

Auditing around the computer

117. When the auditor considers only the non-IT controls in assessing control risk, it is commonly
referred to as
A. Auditing around the computer C. The single-stage unit
B. Generalized audit software (GAS) D. The test deck approach

118. When the client uses a computer, but the auditor chooses to use only the non-IT segment of
internal control to assess control risk, it is referred to as auditing around the computer. Which
one of the following conditions need not be present in order to audit around the computer?
A. Computer programs must be available in English
B. The source documents must be available in a non-machine language
C. The documents must be filed in a manner that makes it possible to locate them
 D. The output must be listed in sufficient detail to enable the auditor to trace individual
transactions

119. Auditing by testing the input and output of a system instead of the computer program itself
will
A. Provide the auditor with the same type of evidence
B. Detect all program errors, regardless of the nature of the output
C. Not detect program errors which do not show up in the output sampled
D. Not provide the auditor with confidence in the results of the auditing procedures

120. The application of auditing procedures using the computer as an audit tool refer to
A. Auditing through the computer
B. Computer assisted audit techniques
C. Data-based management system
D. Integrated test facility

121. Which of the following is a disadvantage of the integrated test facility approach?
A. ITF is simply an automated version of auditing “around” the computer
B. In establishing fictitious entities, the auditor may be compromising audit independence
C. The auditor may not always have a current copy of the authorized version of the client’s
program
D. Removing the fictitious transactions from the system is somewhat difficult and, if not
done carefully, may contaminate the client’s file

122. One common type of CAAT is the use of audit software to process data of audit significance
from the entity’s information system. An audit software that has widespread popularity
because it is easy to use and requires little computer background on the part of the auditor;
it can be used on both mainframe and PC systems; it allows the auditor to performs his/her
tests independent of the entity’s computer processing personnel; and it can be used to audit
the data in most file formats and structures is called a
A. Utility program
B. Customized program
C. Purpose-written program
D. Package or generalized audit software (GAS)

123. An independent auditor studies and evaluates a client’s IT system. The auditor’s study
includes two phases: (1) a review of the system and (2) tests of controls. The latter phase
might include which of the following?
A. Examination of system flowcharts to determine whether they reflect the current status
of the system
B. Examination of the systems manuals to determine whether existing procedures are
satisfactory
C. Examination of the machine room log book to determine whether control information is
properly recorded
 D. Examination of organization charts to determine whether IT department responsibilities
are properly separated to afford effective control

124. Most auditors evaluate application and general controls in what manner?
A. Most auditors evaluate application and general controls simultaneously
B. Most auditors evaluate the effectiveness of application controls before evaluating general
controls
C. Most auditors evaluate the effectiveness of general controls before evaluating application
controls
D. Most auditors evaluate application and general and general controls only if they do not
intent to rely on systems controls

125. To obtain evidence that user identification and password controls are functioning, an auditor
would most likely
A. Attempt to sign on to the system using invalid user identification and passwords
B. Write a computer program that simulates the logic of the client’s access control software
C. Extract a random sample of processed transactions and ensure that the transactions were
appropriately authorized
D. Examine statements signed by employees stating that they have not divulged their user
identifications and passwords to any other person

126. Which of the following is not one of the three categories of testing strategies when auditing
through the computer?
A. Embedded audit module C. Pilot simulation
B. Parallel simulation D. Test data approach

127. A file for recording individual acquisition, cash disbursements and acquisition returns and
allowances for each vendor is the
A. Accounts payable master file
B. Acquisitions transactions file
C. Cash disbursement transaction file
D. Summary acquisition report

128. The client’s accounts payable master file should be the same as the vendor’s statement,
except for the following:
A. Disputed amounts C. Both a and b
B. Timing differences D. none of the answers

129. An important control in the accounts payable and IT departments is to require that those
personnel who record acquisitions do not have access to the:
A. Vendor’s price lists
B. The accounts payable master file
C. Lists of vendor’s name and addresses
D. Cash, trading securities and other assets
130. The total of the individual employees’ earnings in the payroll master file equals the:
A. Total gross pay for the current week’s payroll
B. Total of the checks drawn to employees for payroll
C. Total balance of gross payroll in the general ledger accounts
D. Total gross payroll plus the total contributed by the employer for payroll taxes

131. An auditor who is testing IT controls in a payroll system would most likely use test data that
contain conditions such as
A. Time tickets with invalid job numbers
B. Overtime not approved by supervisors
C. Deductions not authorized by employees
D. Payroll checks with authorized signatures

132. The most common control deficiency in the personnel and payroll cycle is the:
A. Inadequate segregation of duties
B. Unlimited access to payroll systems
C. Attitude of management towards control
D. Little comparison of personnel and payroll records

133. Perpetual inventory master files provide a record:

A. Of items on hand
B. Of the use of raw materials and sale of finished goods
C. That can be used to pinpoint responsibility for custody
D. For all three of the above
 Standard Audit Report

Introduction

1. A document issued by an entity, ordinarily on an annual basis, which includes its financial
statements together with the auditor’s report thereon.
A. Annual report
B. Auditor’s report
C. Management assertions
D. Statement of management’s responsibility

2. The auditing profession recognized the need for uniformity in reporting as a means of
A. Defending against lawsuits
B. Upgrading the communication skills of auditors
C. Standardizing the policies of various CPA firms
D. Promoting credibility of the report in the global market place

3. A measure of the uniformity in the form and content of the auditor’s report is desirable because:
A. It helps the auditors avoid legal liability
B. It helps the readers understand the report
C. It helps the auditor identify the usual circumstances that are expected to occur
D. It makes the auditors more informed of their responsibilities with respect to audit report

4. The element of the auditor’s report that distinguishes it from reports that might be issued by
others is
A. Addressee C. Opinion paragraph
B. Auditor’s signature D. title

5. The element of the auditor’s report that identifies the financial statement audited is the
A. Introductory paragraph C. Opinion paragraph
B. Management’s responsibility D. Title

6. Auditing standards require that the audit report must be titled. This is done in order to
A. Indicate that the auditor is a CPA
B. Identify the financial statements audited
C. Distinguish the report from the report that might be issued by others
D. Emphasize that the report is not a guarantee as to the fair presentation of the financial
statements

7. Auditing standards require that the audit report must be titled, and the title must
A. Include the word “independent”
B. Indicate whether the auditor is CPA
C. Not include any discriminatory language
D. Indicate whether the auditor is proprietorship, partnership or incorporated
Unqualified Opinion

8. A client makes test counts on the basis of a statistical plan. The auditor observes such counts are
deemed necessary and is able to become satisfied as to the reliability of the client’s procedures.
In reporting on the results of the audit, the auditor
A. Can express an unmodified opinion
B. Must qualify the opinion if the inventories were material
C. Is required to disclaim an opinion if the inventories were material
D. Must comment in an Emphasis of Matter paragraph as to the inability to observe year-end
inventories

The Standard Audit Report

9. Which of the following is not one of the basic elements of the auditor’s report?
A. Auditor’s signature C. Date of the report
B. Client’s address D. Title

10. An entity’s management is responsible for the preparations and fair presentation of the financial
statements its responsibility includes the following, except
A. Selecting and applying appropriate accounting policies
B. Making accounting estimates that are reasonable in the circumstances
C. Assessing the risks of material misstatement of the financial statements
D. Designing, implementing and maintaining internal control relevant to the preparation and
presentation of financial statements

11. The introductory paragraph of the auditor’s report should

A. Identify the name of the entity for whom the report is prepared
B. Refer to the summary of significant accounting policies and explanatory notes
C. State the auditor’s responsibility to express an opinion on the financial statements
D. State that the management is responsible for the preparation and fair presentation of the
financial statements

12. Which of the following statements is not included in the auditor’s responsibility selection of the
standard audit report?
A. That the audit was conducted in accordance with Philippines standards on Auditing
B. That the auditor’s responsibility is to express an opinion on the financial statements based on
the audit
C. That the responsibility of the auditor is to express an opinion on the financial statements
based on the audit
D. That audit includes examining on a test-basis evidence supporting the amounts and
disclosures in the financial statements

13. How are management’s responsibility and the auditor’s responsibility represented in the standard
auditor’s report
 A B C D
Management’s responsibility Explicitly Explicitly Implicitly Implicitly
Auditor’s responsibility Explicitly Implicitly Explicitly Implicitly

14. Which of the following is not a true statement? In the opinion paragraph of the standard
unqualified report, the auditor required to state
A. That the financial statements are presented fairly
B. An opinion about the financial statements taken as a whole
C. Whether management has or has not made adequate disclosure
D. A conclusion about whether the company followed the applicable financial reporting
framework

15. The fair presentation of the financial statements in accordance with financial reporting standards
is the responsibility of the:
A. The internal auditor
B. The external auditor
C. The company’s management
D. The Securities and Exchange Commission

16. The auditor’s judgement as to whether the financial statements are presented fairly, in all
material respects, is made in the context of
A. Philippine Standards on Auditing
B. The professional ethical requirements
C. Generally accepted auditing standards
D. Applicable financial reporting framework

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

18. The most common type of audit report contains a(n)

A. Advance opinion C. Qualified opinion
B. Disclaimer of opinion D. Unqualified opinion

19. If a misstatement is immaterial relative to the financial statements of the entity for the current
period and is not expected to have a material effect in future periods, it is appropriate to issue
A. A disclaimer of opinion C. An adverse opinion
B. A qualified opinion D. An unmodified opinion

20. Which of the following is not specifically stated in the standard auditor’s report?
A. The auditor’s responsibility is to express an opinion on the financial statements based on his
or her audit
 B. The auditor believes that sufficient appropriate evidence was obtained to provide a basis for
an auditor’s opinion
C. An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements
D. The auditor is responsible for the preparation and the fair presentation of the financial
statements in accordance with the applicable financial reporting framework

21. Which of the following is incorrect about the standard audit report?
A. The opinion paragraph of an auditor’s report on financial statements refers to PFRS
B. Examination of evidence on a test basis is explicitly represented in the standard auditor’s
report
C. The consistent application of accounting principles is implicitly represented in the standard
auditor’s report
D. The management’s responsibility for the financial statements is explicitly represented in the
auditor’s standard audit report

Explanatory Language Added To The Auditor’s Standard Report

22. When financial statements contain a departure from financial reporting framework because, due
to unusual circumstances, the statements would otherwise be misleading, the auditor should
explain the unusual circumstances in a separate paragraph and express an opinion that is
A. Adverse
B. Qualified
C. Unqualified
D. Qualified or adverse, depending on pervasiveness of effect on financial statements

23. Which of the following circumstances will not affect the auditor’s opinion?
A. Significant uncertainties affecting the financial statements
B. A limitation on the scope of the auditor’s work imposed by the client
C. A limitation on the scope of the auditor’s work imposed by the circumstances
D. Material misstatements in the financial statements that the client refuses to correct

24. When the auditor concludes that there is substantial doubt about the entity’s ability to continue
as a going concern for a reasonable period of time, the auditor should
A. Issue either qualified or adverse opinion
B. Report to the audit committee the need to adjust management estimates
C. Consider the adequacy of disclosure in the notes to financial statements
D. Re-issue the prior year’s audit report and add explanatory paragraph that specifically refers
to “substantial doubt” and “going concern”

25. The independent auditor has concluded that a substantial doubt remains about a client’s ability
to continue in existence, but the client’s financial statements have properly disclosed all of its
solvency problems. The auditor would probably issue a(n)
A. Standard unqualified report
 B. “Except for” qualified opinion
C. Unqualified opinion with other matter paragraph
D. Unqualified opinion with emphasis of a matter paragraph

26. An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going
concern for a reasonable period of time. If the entity’s disclosures concerning this matter are
adequate, the audit report may include a(n):
A B C D
Adverse opinion Yes Yes No No
Qualified opinion Yes No Yes No

27. Which of the following is a matter that does not affect the auditor’s opinion?
A. Emphasis of matter
B. Scope limitations imposed by the client
C. Scope limitations imposed by circumstances
D. Disagreement with management regarding acceptability of accounting policies and the
methods of their application

28. An auditor includes an explanatory paragraph in an otherwise unqualified report in order to

emphasize an item disclosed in the notes to the financial statements. The inclusion of this
paragraph:
A. Is considered a qualification of the report
B. Is appropriate and would not negate the unqualified opinion
C. Necessities a revision of the opinion paragraph to include the phrase “with the foregoing
explanation”
D. Is a violation of generally accepted reporting standards if this information is disclosed in
footnotes to the financial statements

29. What is the purpose of the following paragraph in an audit report on financial statements: “………
we draw attention to not X in the financial statements ………”?
A. An inappropriate reporting C. Other matter paragraph
B. Emphasis of a matter D. Qualification of an opinion

30. If an auditor is satisfied that sufficient evidence supports management’s assertions about an
uncertainty and its presentation or disclosure, the auditor should
A. Express an unmodified opinion with an Other Matter Paragraph
B. Express a modified opinion with an Emphasis of Matter paragraph
C. Express an unmodified opinion with an Emphasis of Matter paragraph
D. Express a qualified opinion or disclaim an opinion, depending upon the materiality of the loss

31. The auditor’s report on financial statements include the following sentences:
“ ………………………… we draw attention to Note X to the financial statements. The Company is
the defendant I a lawsuit alleging infringement of certain patent rights and claiming royalties and
punitive damages. The Company has filed a counter action, and preliminary hearings and
 discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot
presently be determined, and no provision for any liability that may result has been made in the
financial statements.”
The above statement:
A. Is a disclaimer of opinion C. Is an emphasis of a matter
B. Is a qualification of an opinion D. Is not appropriate

32. Addition of an “emphasis of a matter” paragraph to what remains an unqualified opinion is least
likely for which of the following situations?
A. An uncertainty
B. Scope limitation
C. A subsequent event
D. Early adoption of accounting standards approved by FRSC

33. The emphasis of a matter paragraph is normally placed:

A. Before the opinion paragraph
B. Between the auditor’s responsibility and opinion paragraphs
C. After the opinion paragraph that contains the auditor’s qualification or disclaimer of opinion
D. After the opinion paragraph but before the section containing other reporting responsibilities

34. An auditor may wish to emphasize a matter included in the financial statements by adding a
separate paragraph to the audit report. In this case the following paragraphs of the audit report
should be modified:
A. Introductory paragraph
B. Auditor’s responsibility paragraph
C. Opinion paragraph
D. None

35. Which of the following statements is correct about “emphasis of a matter paragraph”?
A. The addition of such paragraph does not affect the auditor’s opinion
B. The paragraph would preferably be presented before the opinion paragraph
C. The addition of such paragraph is to be construed as a modification of the auditor’s report
D. The paragraph is normally used by the auditor to explain the reasons for lack of independence

36. Which of the following statements is not correct about “emphasis of a matter paragraph”?
A. The addition of such paragraph does not affect the auditor’s opinion
B. The paragraph would preferably be presented after the opinion paragraph
C. The addition of such paragraph is not to be construed as a modification of the auditor’s report
D. The paragraph is normally used by the auditor to highlight certain items in the financial
statements

37. A major customer of an audit client suffers a fire prior to completion of year-ended field work.
The audit client believes that this event could have a significant direct effect on the financial
statements. The auditor should:
 A. Disclose the event in the auditor’s report
B. Advise management to adjust the financial statements
C. Advice management to disclose the event in notes to the financial statements
D. Withhold submission of the auditor’s report until the extent of the direct effect on the
financial statements is known

Addressing the Report

38. The auditor may address the report to all of the following, except:
A. The client company
B. The stockholders of client company
C. The board of directors of client company
D. The president or the chief executive officer of the client company

Dating the Report

39. 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 financials statements subject to audit
A. Date of the audit report
B. Date of financial statements
C. Date of management approval
D. Date of financial statements issuance

40. This is the date selected by the practitioner date the report
A. Date of report C. Dual date
B. Date of signing D. Last day of field work

41. The audit date indicates

A. The last day of fiscal period
B. The last day on which users may institute a lawsuit against either client or auditor
C. The date on which the financial statements were filed with the Securities and Exchange
Commission
D. The last day of auditor’s responsibility for the review of significant events that occurred after
the date of the financial statements

42. The date of the audit report is important because

A. It should coincide with the date of the financial statements
B. PSA’s require all audits to be performed on a timely basis
C. The auditor bills time to the client up to and including the audit report date and the statement
to the client should reflect this date
D. The user has a right to expect that the auditor has performed certain procedures to detect
subsequent events that would materially affect the financial statements through the date o
the report
 43. The appropriate date for the audit report is the one on which the
A. Client’s fiscal year ended
B. Auditor and client entered into a contract
C. Auditor types and delivers the report to client
D. Auditor has concluded procedures in the field

44. The date of the auditor’s report normally coincides with the date
A. The audit report is issued
B. The financial statements are issued
C. The client engaged the services of the auditor
D. The management approves the financial statements

45. The audit report should not be dated

A. Later than the balance sheet date
B. Earlier than the date of the issuance of the audit report
C. Earlier than the date of issuance of the financial statements
D. Earlier than the date on which the auditor obtains sufficient appropriate evidence

46. 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 of them
A. Date of the auditor’s report
B. Date of the financial statements
C. Date of the financial statements are issued
D. Date of approval of the financial statements

47. If the balance sheet of a privately held company is dated December 31, 2020, the audit report is
dated March 6, 2021, and both are released on March 15, 2021, this indicates that the auditor
has searched for material unrecorded transactions and events that occurred up to
A. December 31, 2020 C. March 15, 2021
B. March 6, 2021 D. None of these

Departure from Unqualified Opinion

Types of Reports

48. Whenever an auditor issues a qualified opinion, the implication is that the auditor
A. Is satisfied that the statements are presented fairly
B. Does not know if the statements are presented fairly
C. Does not believe the statements are presented fairly
D. Is satisfied that the statements are presented fairly “except for” a specific aspect of them

49. An auditor may reasonably issue a qualified opinion for

 A B C D
Inadequate disclosure Yes Yes No No
Scope limitation Yes No Yes No

50. An auditor may reasonably issue a qualified opinion for

A B C D
Disagreement with management regarding Yes Yes No No
accounting polices
Scope limitation Yes No Yes No

51. A qualified opinion should be expressed as being

A. Tantamount to standard audit report
B. Tantamount to disclaimer of opinion
C. “Except for” the effects of the matter to which the qualification relates
D. “Subject to” the effects of the matter to which the qualification relates

52. The least severe type of report for disclosing departures from PFRS is the
A. Adverse opinion
B. Disclaimer of opinion
C. Qualified opinion
D. Report on unaudited financial statements

53. On January 2, 2021, the TANYA CO. received a notice form its primary supplier that effective
immediately all wholesale prices would be increased by 10%. On the basis of the notice, TANYA
revalued its December 31, 2020 inventory to reflect its higher costs. As a result, the statement of
financial position reflects inventory stated at an amount higher than its net realizable value. The
inventory constituted a material proportion of total assets; however, the effect of the revaluation
was material to the current assets but not to total assets or net income. In reporting on the
company’s financial statements for the year ended December 31, 2020, in which inventory is
valued at the adjustment amount, the auditor would most likely
A. Disclaim an opinion
B. Express a qualified opinion
C. Express an adverse opinion
D. Express an unmodified opinion provided the nature of the adjustment and the amounts
involved are disclosed in notes to the financial statements

54. The auditor shall express an adverse opinion when

A. The auditor, having obtained sufficient appropriate evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to the financial statements
B. The auditor, having obtained sufficient appropriate audit evidence, conclude that
misstatements, individually or in the aggregate, are material, but not pervasive, to the
financial statements
C. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, but the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive
 D. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, and the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive

55. Under which of the following circumstances is a disclaimer of opinion inappropriate?

A. The client refuses to permit its attorney to furnish information requested in a letter of audit
inquiry
B. The financial statements fail to contain adequate disclosure concerning related party
transactions
C. The auditor is unable to determine the amounts associated with fraud committed by the
client’s management
D. The auditor is engaged after fiscal year end and is unable to observed physical inventories or
apply alternative procedures to verify their balances

56. When the management does not amend the financial statements in circumstances where the
auditor believes they need to be amended and the auditor’s report has not been released to the
entity, the auditor should express
A. Unqualified opinion
B. Qualified or adverse opinion
C. Qualified or disclaimer of opinion
D. Unqualified opinion with explanatory paragraph

57. If the results of the audit procedures do not enable the auditor to conclude that the aggregate of
uncorrected misstatements is not material and the management refuses to adjust the financial
statements, the auditor’s report should be modified to include:
A. A disclaimer of opinion
B. Either qualified or adverse opinion
C. Either qualified or disclaimer of opinion
D. An unqualified opinion with explanatory paragraph

58. When the auditor knows that the financial statements may be misleading because they were not
prepared in conformity with PFRS issue
A. A qualified opinion
B. An adverse opinion
C. A disclaimer of opinion
D. A qualified or an adverse opinion, depending on the materiality of the item in question

59. In a qualified, adverse or disclaimer report, the auditor

A. Has not performed a satisfactory audit
B. Is not satisfied that the financial statements are presented fairly
C. Either a or b
D. None of these

Modifications to the Audit Report

 60. When the auditor expresses an opinion that is other than the unqualified, a clear description of
all the substantive reasons should be included in the report and, unless the impracticable, a
qualification of possible effects on the financial statements. This information would ordinarily be
set out in
A. The opinion paragraph of the auditor’s report
B. A separate paragraph following the opinion paragraph
C. A separate paragraph preceding the opinion paragraph
D. The paragraph that describes the auditor’s responsibility

61. An auditor should disclose the substantive reasons for expressing an adverse opinion in an
explanatory paragraph
A. Following the opinion paragraph
B. Preceding the opinion paragraph
C. Within the notes to the financial statements
D. Preceding the management’s responsibility paragraph

Scope Limitation

62. Which of the following would ordinarily result to a modification of opinion on financial
statements?
A. Going concern uncertainties
B. Limitations that are beyond the control of management
C. Significant uncertainties affecting the financial statements
D. Emphasis of a matter discussed in the notes to the financial statements

63. Which of the following does not properly describe a scope of limitation?
A. The client’s accounting records are inadequate
B. The auditor is unable to perform necessary audit procedures
C. The audit is unable to gather sufficient appropriate evidence
D. The client refuses to disclose essential information in the notes to financial statements

64. An auditor concludes during the planning and internal control phase that the client is not
auditable because of deficient accounting records. Under such circumstances, the auditor must
Not:
A. Issue an adverse opinion
B. Issue a disclaimer of opinion
C. Send the client a bill for services rendered
D. Withdraw from the engagement without issuing a report

65. If the auditor is unable to gather sufficient appropriate evidence concerning the opening balance,
the auditor’s report should include:
A B C D
Qualified opinion Yes Yes No No
 Adverse opinion Yes No Yes No
Disclaimer of opinion No Yes No Yes

Departure From GAAP

66. When management prepares financial statements on the basis of a going concern and the auditor
believes the company may not continue as a going concern the auditor should issue
A. Adverse opinion
B. Qualified opinion
C. Disclaimer of opinion
D. Unqualified opinion with an explanatory paragraph

Accounting Changes

67. If the current periods accounting policies have not been consistently applied in relation to the
opening balances and if the change has not been properly accounted for and disclosed, the
auditor’s report should include:
A B C D
Qualified opinion Yes Yes No No
Adverse opinion Yes No Yes No
Disclaimer of opinion No Yes No Yes

Inadequate Disclosures

68. An auditor who concludes, that an uncertainty is not adequately disclosed in the financial
statements would most likely issue a:
A. Special report
B. Qualified report
C. Disclaimer of opinion
D. Unqualified report with emphasis o a matter paragraph

69. Inadequacy of disclosures in the notes to financial statements normally requires the auditor to
express a qualified opinion on the client’s financial statements. When this occurs, the auditor
should disclose the substantive reasons for expressing a qualified opinion in an explanatory
paragraph
A. Following the opinion paragraph
B. Preceding the opinion paragraph
C. Within the notes to the financial statements
D. Preceding the paragraph that describes the auditor’s responsibility

Going Concern & Uncertainties

70. In extreme cases, such as situations involving multiple uncertainties that are significant to the
financial statements, the auditor may consider it appropriate to express a
A. Unqualified opinion
 B. Disclaimer of opinion
C. Qualified or adverse opinion
D. Unqualified opinion with explanatory paragraph

71. When there are multiple uncertainties significantly affecting the financial statements, the
auditor’s report would most likely contain
A. A disclaimer of opinion C. An adverse opinion
B. A qualified opinion D. An unqualified opinion

72. When the auditor concludes that there is a material going concern uncertainty the appropriate
audit report would be
A. A disclaimer of opinion
B. A qualified opinion with an explanatory paragraph
C. An unqualified opinion with emphasis of matter paragraph
D. A and C are correct

Unaudited Information

73. When an independent CPA is associated with the financial statements of a publicly held company
but has not audited or reviewed the financial statements, the appropriate form of report that
must include
A. Compilation opinion C. Explanatory
B. Disclaimer of opinion D. Negative assurance

Comprehensive

74. An auditor may not be able to express an unqualified opinion when the following circumstances
exist and, in the auditor’s judgment, the effect of the matter is or may be material to the financial
statements
A B C D
There is a limitation on the scope of the Yes Yes No No
auditor’s work
There is a disagreement with management Yes Yes Yes No
regarding the acceptability of the accounting
polices selected, the method of their application
or the adequacy of financial statement disclosures
The auditor wants to give emphasis to an important Yes No No Yes
matter affecting the financial statements

75. Conditions requiring a departure from an unqualified audit report include all, but which of the
following?
A. The audit partner’s dependent child received a gift of 10 shares of a client’s stock for her
birthday from a grandparent
B. Management refused to allow the auditor to confirm significant accounts receivable for which
there were no alternative procedures performed
 C. Management has determined that certain equipment should be reported in the balance sheet
at their replacement values rather than historical costs. The auditors do not concur
D. Management has decided to not allow the auditor to confirm significant accounts receivable,
but the auditor examined subsequent cash receipts related to the accounts in question

Other Information

76. The are not presented as complete financial statements capable of standing alone, but are integral
part of the current period
A. Comparative financial statements
B. Corresponding figures
C. Notes to financial statements
D. Supplementary report

77. Amounts and other disclosures relating to the current period

A. Current period figures
B. Existing disclosures
C. Financial statement ancillaries
D. Notes to the financial statements

78. The “other information” is a published report containing audited financial statements may be
relevant to an independent auditor’s examination. With respect to “other information”
A. The auditor must include the “other information” in the report
B. The auditor need not be concerned with the “other information”
C. The auditor’s responsibility does not extend beyond the financial information identified in the
report
D. The auditor is obligated to perform auditing procedures to corroborate “other information”
obtained in a document

79. The “other information” in a published report containing audited financial statements may be
relevant to an independent auditor’s examination. With respect to “other information”
A. The auditor must include the “other information” in the report
B. The auditor needs to be concerned with the “other information”
C. The auditor is obliged to perform auditing procedures to corroborate “other information”
D. The auditor’s responsibility does not extend beyond the financial information identified in the
report

80. Which of the following best describes the auditor’s responsibility for “other information” included
in the annual report to the stockholders that contains financial statements and the auditor’s
report?
A. The auditor has no obligation to read the other information
B. The auditor should extend the examination to the extent necessary to verify the other
information
 C. The auditor must modify the auditor’s report to state that the other information is unaudited
or not covered by the auditor’s report
D. The auditor has no obligation to corroborate the other information but should read it to
determine whether it is materially inconsistent with the financial statements

81. This exists, when other information, not related to matters appearing in the financial statements,
is incorrectly stated or presented
A. Material inconsistency
B. Material misstatement
C. Material misstatement of fact
D. Material error affecting the other information

82. This exists when other information contradicts information contained in the audited financial
statements
A. Material difference
B. Material error
C. Material inconsistency
D. Material misstatement of fact

83. It exists when other information contradicts information contained in the audited financial
statements
A. Material inconsistency C. Material weakness
B. Material misstatement of fact D. Misstatement

84. 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. Unqualified opinion
B. Qualified or adverse opinion
C. Qualified or disclaimer of opinion
D. Unqualified opinion with other matter paragraph

85. 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 statements do not require revision, but the client refuses to revise or eliminate the
material inconsistency the auditor may
A. Consider the matter closed since the other information is in the audited financial statements
B. Issue an “except for” qualified opinion after discussing the matter with the client’s board of
directors
C. Revise the auditor’s report to include a separate paragraph describing the material
inconsistency
D. Disclaim an opinion on the financial statements after explaining the material inconsistency in
a separate explanatory paragraph
 Audit Related Services

1. An auditor is associated with the financial information when he:

A B C D
Attaches report to the financial information Yes Yes No No
Consents to the use of his name in a No Yes Yes No
professional connection

2. A CPA firm is “associated with the financial statements”

A. Only when it does a financial audit
B. If it performs any services at all for the client
C. Only when it does attestation services, such as a review or an audit
D. Even if a CPA firm only assists a client in preparing financial statements, but does not perform
an audit compilation

3. According to AASC pronouncement, audit related services include:

A. Agreed-upon procedures C. Examinations
B. Consultancy D. Review

4. According to PSRS, audit related services include:

A. Review and compilation
B. Agreed-upon procedures and review
C. Compilation and assurance engagements
D. Compilation and agreed-upon procedures

Agreed-upon procedures

5. A report on factual findings is the end product of the auditor when performing
A. Agreed-upon procedures C. Examination
B. Audit D. Review

6. A CPA may accept an engagement to apply agreed-upon procedures on specified element of

financial statements provided
A. The CPA will issue an opinion on the specified element
B. An examination of the specified element is also conducted
C. The client takes full responsibility for the procedures to be performed
D. An audit of the financial statements taken as a whole is also performed

7. Engagement to apply agreed-upon procedures on certain amounts within a financial statement

may be accepted provided
A. The CPA has expressed opinion on the financial statements taken as a whole
B. The CPA takes full responsibility for the adequacy of the procedures to be performed
C. The CPA provides only a limited assurance about the reliability of the financial statements
 D. The distribution of the report is limited only to specified parties involved because other
readers of the report might misinterpret the results

8. Engagement to apply agreed-upon procedures on certain accounts within a financial statement

may be accepted provided
A. The distribution of the report is limited only to specified parties involved
B. The CPA has expressed opinion on the financial statements taken as a whole
C. The CPA takes full responsibility for the adequacy of the procedures to be performed
D. The CPA provides only a limited assurance about the reliability of the financial statements

9. Which of the following ethical principles does not apply to an agreed-upon procedure
engagement?
A. Confidentiality
B. Independence
C. Professional behavior
D. Professional competence and due care

10. A CPA who is not independent of the client may issue a/an
A. Special report
B. Review report
C. Agreed-upon procedure report
D. Report expressing a qualified opinion

11. The report on an agreed-upon procedures engagement should contain

A. A general description of the procedure performed
B. A statement that the auditor is independent of the entity
C. An expression of positive assurance based on the specific procedures performed
D. Identification of the purpose for which the agreed-upon procedures were performed

Compilation

12. The term “accountant” has been used by PSA to refer to a CPA in public practice who is engaged
to
A. Apply agreed-upon procedures
B. Audit financial statements
C. Compile financial statement
D. Review financial statements

13. Ethical principles governing compilation of financial statements include

A B C D
Independence Yes Yes Yes No
Competence Yes Yes No Yes
Professional behaviors Yes No No Yes
 14. Which of the following procedures would an accountant most likely perform in a compilation
engagement?
A. Assess risk components
B. Apply analytical procedures
C. Read financial information
D. Test the accounting records

15. Which of the following procedures would an accountant most likely perform in a compilation
engagement?
A. Assess risk components
B. Apply analytical procedures
C. Test the accounting records
D. Collect, classify and summarize financial statements

16. 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
D. Less extensive than review procedures but more extensive than agreed-upon procedures

17. In the report accompanying compiled financial statements, which of the following statements
should not be included?
A. “Management is responsible for these financial statements”
B. “We have not audited or reviewed these financial statements and accordingly express no
assurance thereon.”
C. “A compilation is substantially less extensive in scope than an examination in accordance with
generally accepted auditing standards.”
D. “On the basis of information provided by management, we have compiled, in accordance with
the Philippine Standard on Related Services 4410….”

18. Which of the following is incorrect about a compilation engagement?

A. The CPA should exercise due care
B. The procedures performed do not enable the accountants to express any form at assurance
C. The CPA uses his auditing expertise to collect, classify and summarize financial statements
D. The engagement ordinarily entails reducing detailed data to a manageable and
understandable form

Special Reports

Special purpose audit engagement

19. Financial statements prepared in accordance with a financial reporting framework designed to
meet the financial information needs of specific users are referred to as
A. General purpose financial statements
 B. Special purpose financial statements
C. Special purpose frameworks
D. Specific purpose financial statements

20. All of the following are special reports excepts reports on financial statements
A. In which the client has limited the scope of the audit
B. Prepare in accordance with a tax basis of accounting
C. Prepared in accordance with a cash basis of accounting
D. Prepared for limited purposes, such as reports that relate only to certain aspects of financial
statements

21. The following examples of special purpose frameworks, except

A. The financial reporting provisions of a contract (for example, a financing agreement)
B. A tax basis of accounting for a set of financial statements that accompany an entity’s tax
return
C. Philippine Financial Reporting Standards (PFRS) promulgated by the Financial Reporting
Standards Council (FRSC)
D. The cash receipts and disbursements basis of accounting for cash flow information that an
entity may be requested to prepare the creditors

22. Auditor’s reports issued in connection with which of the following is not considered to be special
report
A. Compliance with aspects of contractual agreements
B. Special elements, accounts or items of a financial statements
C. Financial statements prepared in conformity with the price level of basis of accounting
D. Compiled financial statements prepared in accordance with appraised liquidating values

23. Other comprehensive basis of accounting may include all of the following except
A. The accrual basis of accounting
B. That used by entity to prepare its income tax return
C. The cash receipts and disbursement basis of accounting
D. The financial reporting provision of a government regulatory agency

24. A report issued in connection with the independent audit of financial information other than an
auditor’s report on financial statements
A. Annual repot
B. Compilation report
C. Modified auditor’s report
D. Special purpose auditor’s report

25. Reports are considered special report when issued in accordance with
A. Feasibility studies presented to illustrate an entity’s results of operations
B. Compliance with aspects of regulatory requirements related to audited financial statements
 C. Pro-form financial presentations designed to demonstrate the effect the hypothetical
transactions
D. Interim financial information reviewed to determine whether material modifications should
be made to the financial statements to conform to GAAP

26. Which of the following is not a special purpose audit engagement?

A. Reports on prospective financial statements
B. Reports on summarized financial statements
C. Reports on components of financial statements
D. Reports on financial statements prepared using other comprehensive basis of accounting

27. The auditor’s report on special purpose audit engagements does not apply to a(n)
A. Audit of financial statements prepared in accordance with PFRS
B. Reports on summarized financial statements derived from annual audited financial
statements
C. Audit engagement that involves expression of an opinion on one or more components of the
financial statements
D. Audit financial statements prepared in accordance with the cash receipts and cash
disbursement basis of accounting

28. CPA’s issue several types of “special audit reports”. Which of the following circumstances would
not require the issuance of a special audit report?
A. The CPA has been retained to audit only the current assets
B. The client’s financial statements are prepared using the cash basis
C. The client’s financial statements are prepared using the accrual basis
D. The CPA has been retained to audit the financial statements of an entity that are prepared in
accordance with a reporting framework required by a regulatory agency

29. Engagements to express an opinion on the entity’s compliance with contractual agreements
should be undertaken only when
A. The CPA’s report will be in the form of negative assurance
B. The overall aspects of compliance relate to accounting and financial matters
C. The contracts specifically require the auditor to express an opinion as to entity’s compliance
D. The financial statements are prepared in conformity with other comprehensive basis of
accounting

30. In the auditor’s opinion on a financial statements prepared in accordance with a special-purpose
framework, we note the following:
“Without modifying our opinion, we draw attention to Note X to the financial
statements, which describes the basis of accounting. The financial statements are
prepared to assist the partners of ABC Partnership in preparing their individual income
tax returns. As a result, the financial statements may not be suitable for another
purpose. Our report is intended solely for ABC Partnership and its partners and should
not be distributed to parties other than ABC Partnership or its partners.”
 A. The opinion paragraph
B. Basis for adverse opinion paragraph
C. “Without modifying our opinion” paragraph
D. Basis of Accounting and Restriction of Use paragraph

Summary financial statements

31. An auditor may report on summary financial statements that are derived from complete
audited financial statements if the
A. Summary financial statements that are distributed only to management and the board
of directors
B. Auditor describes the additional review procedures performed on the summary
financial statements
C. Summary financial statements are presented in comparative form with the prior year’s
summarized financial statements
D. Auditor indicates whether the information in the summary financial statements is
consistent with the audited financial statements from which it was derived

32. An auditor may report on summary financial statements that are derived from complete
audited financial statements if the
A. Summary financial statements are distributed only to management and the board of
directs
B. Audit describes the additional review procedures performed on the summary financial
statements
C. Summary financial statements are presented in comparative form with the prior year’s
summarized financial statements
D. Auditor indicates whether the information in the summary financial statements is
consistent with the audited financial statements from which it was derived

Specific element

33. An auditor may express an opinion on an entity’s accounts receivable balance even if the
auditor has disclaimed an opinion on the financial statements taken as a whole provided
the
A. Use of the report on the accounts receivable is restricted
B. Auditor also reports on the current asset portion of the entity’s balance sheet
C. Report on the accounts receivable discloses the reason for the disclaimer of opinion on
the financial statements
D. Report on the accounts receivable separately from the disclaimer of opinion on the
financial statements

34. Which of the following statements is correct with respect to an auditor’s report expressing
an opinion on a specific element on a financial statement?
 A. Such a report can only be issued if the auditor is also engaged to audit the entire set of
financial statements
B. The attention devoted to the specific element is usually less than it would be if the
financial statements as a whole were audited
C. 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
D. 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 financial
statements

35. An auditor may express an opinion on an entity’s accounts receivable balance even if the
auditor has disclaimed an opinion on the financial statements taken as a whole provided
the
A. Use of the report on the accounts receivable is restricted
B. Auditor also reports on the current asset portion of the entity’s balance sheet
C. Report on the accounts receivable discloses the reason for the disclaimer of opinion on
the financial statements
D. Report on the accounts receivable is presented separately from the disclaimer of
opinion on the financial statements

36. Which of the following statements is correct with respect to an auditor’s report expressing
an opinion on a specific element on a financial statement?
A. Such a report can only be issued if the auditor is also engaged to audit the entire set of
financial statements
B. The attention devoted to the specific element is usually less than it would be if the
financial statements as a whole were audited
C. 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
D. The auditor who has expresses an adverse opinion on the financial statements as a
whole can never express an unmodified opinion on a specific element in these financial
statements

37. Which of the following statements is correct with respect to an auditor’s report expressing
an opinion on a specific item on a financial statement?
A. Materiality must be related to the specified item rather than to the financial statements
taken as a whole
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 devoted to the specified item is usually less than it would be if the
financial statements as a whole were being audited
D. The auditor who has expressed an adverse opinion on the financial statements as a
whole can never express an opinion on a specified item in the financial statements

Prospective financial statements

38. The party responsible for assumptions identified in the preparation of prospective financial
statements is usually
A. A third-party lending institution C. The client’s management
B. The client’s independent auditor D. The reporting accountant

39. Prospective financial information can include financial statements or one or more elements
of financial statements and may be prepared
A B C D
For distribution to third parties Yes Yes Yes No
As an internal management tool Yes Yes No Yes
As attachment to entity’s income tax return Yes No Yes No

40. Given one or more hypothetical assumptions, a responsible party may prepare to the best
of its knowledge and belief, an entity’s expected financial position, results of operations,
and changes in cash flows. Such prospective financial statements are known as
A. Financial forecasts
B. Financial projections
C. Partial presentation
D. Pro-forma financial statements

41. Financial projection is a prospective financial information prepared on the basis of:
A B C D
Assumptions Hypothetical Yes Yes Yes No
Best estimate Yes No No Yes
A mixture of best estimate and Yes Yes No No
hypothetical assumptions

42. Firms sometimes provide future-oriented financial information as part of their regular disclosures.
Such information may take the form of either a forecast or a projection. The distinction between
a forecast and a projection is:
A. Projections are frequently non-quantitative in nature
B. Forecasts are predictions with a shorter time horizon than projections
C. Only forecasts are based on management’s planned course of action
D. A projection is based on assumptions that include hypothesis which may be different from
management’s opinion of the most likely set of events

43. Which of the following phrases refer to forecast?

A. Statements prepared in considerably less detail as compared to unabridged financial
statements
B. Prospective financial information prepared on the basis of hypothetical assumptions about
future events and management actions which are not necessarily expected to take place; and
a mixture of best-estimate and hypothetical assumptions
 C. Prospective financial information prepared on the basis of assumptions as to future events
which management expects to take place and the actions management expect to take as of
the date the information is prepared (best-estimate assumptions)
D. None of these statements describe forecast

Environmental performance report

44. A report, separate from the financial statements, in which any entity provides third parties with
qualitative information on the entity’s commitments towards the environmental aspects of the
business, its policies and targets in that field, its achievement in managing the relationship
between its business processes and environmental risk, and quantitative information on its
environmental performance
A. Annual report
B. Environmental performance report
C. Environmental risk
D. Special purpose audit report

Statement of cash receipts & disbursements

45. An auditor is reporting a statement of cash receipts and disbursements. This statement is best
referred to in the opinion paragraph by which of the following descriptions?
A. “statement of cash flows”
B. “Cash receipts and disbursements”
C. “Income statement resulting from cash transactions”
D. Results of operations arising from cash transactions”

Report on internal control

46. Hershey, CPA, is preparing a report on internal control. She has already discussed the internal
control weaknesses with the appropriate client officials. During these discussions, the client
stated that, given its circumstances, there was no practicable corrective action which could be
taken for one of the major weaknesses and therefore asked that it not be included in Hershey’s
report. In the final analysis, Hershey concurred that no corrective action by the management is
practicable. Which of the following is the MOST appropriate course of action for Hershey to take?
A. She may omit the weakness from the report without further mention
B. She must include this weakness in her report; otherwise, she will be in violation of GAAS
C. She may omit this weakness from the report but should send a confidential memo to the
Board of Directors pointing out the nature of the weakness and why it was omitted from her
report
D. She may omit the weakness from her report but should clearly state that the report is
restricted to material weaknesses for which corrective action by the management may be
practicable in the circumstances

Service Organizations
47. Which of the following phrases best describes a service organization?
A. An entity that uses a service organization and whose financial statements are being audited
B. The policies and procedures designed, implemented and maintained by the service
organization to provide user entities with the services covered by the service auditor’s report
C. A third-party organization (or segment of a third-party organization) that provides service to
the user entities that are part of those entities’ information systems relevant to financial
reporting
D. A service organization used by another service organization to perform some of the service
provided to user entities that are part of those user entities’ information systems relevant to
financial reporting

48. Controls that the service organization which assumes, in the design of its service, will be
implemented by the user entities, and if necessary, to achieve control objectives, are identified in
the description of its system
A. Service auditor controls
B. Complementary user entity controls
C. End-user license agreement controls
D. General IT controls over the service organization

49. A Type II report is a report that comprises the following:

A. A description of the service auditor’s tests of the controls and the results thereof
B. A report by the service auditor with the objective of conveying reasonable assurance that
includes the service auditor’s opinion on the description of the controls to achieve the
specified control objectives, and the operating effectiveness of the controls
C. A description prepared by the management of the service organization, of the service
organization’s system, control objectives and related controls, their design and
implementation as at a specified date or throughout a specified period and, in some cases,
their operating effectiveness throughout a specified period
D. All of these

50. The auditor who, at the request of the service organization, provides an assurance report on the
controls of a service organization
A. Practitioner C. Service auditor
B. Requested auditor D. Subservice auditor

51. An auditor who audits and reports on the financial statements of a user entity
A. Practitioner C. Service auditor
B. Requested auditor D. User auditor

52. Many clients now have their data processed at an independent computer service center rather
than have their own computer. The difficulty the independent auditor faces when a computer
service is used is:
A. Gaining the permission of the service center to review their work
 B. In determining the adequacy of the service center’s internal controls
C. Finding compatible programs that will analyze the service center programs
D. In trying to abide by the Code of Ethics to maintain the security and confidentiality of client’s
data

Audit of Banks

53. This is a type of financial institution whose principal activity is the taking of the deposits and
borrowing for the purpose of lending and investing and that is recognized as a bank of the
regulatory authorities in any country which it operates
A. Bank C. Investment house
B. Depositorium D. Stock broker

54. Security given by a borrower to a lender as a pledge for repayment of a loan, rarely given in the
case of interbank business
A. Collateral C. Line of credit
B. Encumbrance D. Options

55. Which document published in 1997 serves as a basic reference for an effective supervisory system
internationally all in all countries?
A. Enhancing Corporate Governance for Banking Organizations
B. PAPS 1004 – The Relationship Between BSP and the Bank’s External Auditors
C. Core Principles for Effective Banking Supervision, a.k.a. Basel Core Principles
D. Statements on Auditing Standards applicable to Banks and Quasi-Banking Institutions

56. Which of the following statements is incorrect?

A. Control over the content and dispatch of confirmation request is the responsibility of the
confirming bank
B. Confirmation of asset repurchase and resale agreements and options outstanding at the
relevant date should also be sought
C. The most commonly requested information is in respect of balances due to from the
requesting bank on current, deposit, loan and other accounts
D. Whenever possible, the confirmation request should be prepared in the language of the
confirming bank or in the language normally used for business purposes

57. Which statement is incorrect regarding inter-bank confirmations?

A. It is usual practice to request a response only if the information submitted is incorrect or
incomplete
B. The requirements for bank confirmation arise from the need of the bank’s management and
its auditors to confirm financial and business relationships
C. While interbank relationships are similar in nature to those between the bank and a non-bank
customer, there may be special significance in some inter-bank relationships
 D. The auditor should decide from which bank or banks to request confirmation, having regard
to such matters as the size of the balances, volume of activity, degree of reliance on internal
controls, and materiality within the context of the financial statements

58. IAPS 1004, on which PAPS 1004 is based, was prepared in association with which of the following?
A. Professional Regulation Commission
B. International Accounting Standards Board
C. Professional Regulatory Board of Accountancy
D. Basel Committee on Banking Supervision (the Basel Committee)

Comprehensive

59. Analytical procedures should be performed whenever a CPA is engaged to

I. Audit III. Compile
II. Review ` IV. Apply agreed-upon procedures

A. Yes, Yes, Yes, No C. No, Yes, No, No

B. Yes, Yes, No, No D. Yes, No, No, Yes

60. Which of the following is not true about the report provided by a CPA?
A. In a review engagement, the CPA moderate assurance is expressed in the form of negative
assurance
B. For agreed-upon procedures, the CPA provides a report on factual findings and no assurance
is expressed
C. In the audit engagement, the auditor provides high level of assurance that the financial
information is free of material misstatement
D. In a compilation engagement, the auditor is expressed, and the users of financial information
do not derive any benefit from the CPA’s involvement

61. Which of the following terms best describes component management?

A. Management responsible for preparing the financial information of a component
B. The materiality level for a component determined by the group engagement team
C. An auditor who, at the request of the group engagement team, performs works on financial
information related to a component for the group audit
D. An entity or business activity for which group or component management prepares financial
information that should be included in the group financial statements

62. All the components whose financial information is included in the group financial statements, are
collectively known as:
A. Business combination C. Group
B. Consolidation D. Pooling

63. Principal auditor is

A. A current period’s auditor who did not audit the prior period’s financial statements
 B. The auditor who was previously the auditor of an entity and who has been replaced by an
incoming auditor
C. The auditor who audited and reported on the prior period’s financial statements and
continues as the auditor for the current period
D. The auditor with responsibility for reporting on the financial statements of an entity whose
financial statements include financial information of one or more components audited by
another auditor

64. A generic term used to categorize a wide variety of financial instruments whose value depends
on an underlying rate or price, such as interest rates, exchange rates, equity prices, or commodity
prices
A. Asset / liability management C. Derivatives
B. Commodity D. Hedge
PSA Questions

1. According to the PSA glossary of Terms, this means to inquire into matters arising from other
procedures to resolve them
A. Confirm C. Validate
B. Investigate D. Verify

2. A requirement of the application of the application of PSAs is for the auditor:

A. Not to obtain clients by solicitation
B. To inspect all fixed assets acquired during the year
C. To charge fees fairly and in relation to time and cost of the engagement
D. To undertake a proper study and evaluation of the existing internal control

3. According to PSA 200, the specific procedures deemed necessary in the circumstances to achieve
the objective of the audit are referred to as the
A. Audit objectives C. Scope of the audit
B. Audit technique D. Substantive tests

4. This refers to the audit procedures that, in the auditor’s judgment and based on the PSAs are
deemed appropriate in the circumstances to achieve the objective of an audit
A. Analytical procedures D. Documentation
B. Audit sampling D. Scope of an audit

5. According to PSA 210, the auditor and the client should agree on the terms of engagement. The
agreed would need to be recorded in a(n)
A. Comfort letter
B. Engagement letter
C. Client representation letter
D. Memorandum to be placed in the permanent section of the auditing working papers

6. According to PSA 220, who should take responsibility for the overall quality on each audit
engagement?
A. The whole audit team
B. The managing partner of the firm
C. The senior auditor assigned to engagement
D. Engagement partner assigned to the engagement

7. The following statements relate to quality control for audit work. Which statement is false?
A. According to PSA 220, audit firms should adopt standardized quality control policies and
procedures
B. On individual audits, the auditor should also implement those quality control procedures
which are appropriate to individual audit
 C. The firm’s general quality control polices, and procedures should be communicated to its
personnel in a manner that provides reasonable assurance that the polices and procedures
are understood and implemented
D. The audit firm should implement quality control policies and procedures designed to ensure
that all audits are conducted in accordance with PSA’s

8. PSA 230 provides general guidelines about the ownership, custody and confidentiality of working
papers. Accordingly,
A. Working papers should not be made available to the client
B. Working papers may be considered a substitute for the client’s accounting records
C. The working papers should be retained by the auditor for a sufficient period of time but to
exceed five years
D. Working papers are the personal property of the auditor and the client has no rights to the
working papers prepared by the auditor

9. Based on PSA 250, non-compliance refers to

A. Unintentional mistakes in the financial statements
B. Personal misconduct by the entity’s management or employees
C. Intentional acts of one or more individuals which result in misstatement in financial
statements
D. Acts of omission by the client which are contrary to prevailing laws and regulations

10. Based on PSA 250, procedures help identify instances of non-compliance with laws and
regulations would include:
A B C D
Inquiry of management as to compliance Yes Yes No No
with laws and regulations
Inspecting correspondence with government agencies Yes Yes Yes No
Obtaining written representations from management Yes No No No

11. According to PSA 259, the risk of not detecting material misstatement due to non-compliance is
high. This can be attributed to all of the following factors, except:
A. Non-compliance may involve conduct designed to conceal it
B. Non-effectiveness of audit procedures may be affected by the limitations of the audit
C. The detection prevention and detection of non-compliance rests with management’s audit
D. There are many laws and regulations, relating primarily to the operating aspects of the entity
that typically do not have a material affect on the financial statements

12. According to PSA 315, “Risk assessment procedures” means

A. Obtaining understanding of entity and its environment, including its internal control
B. Performing substantive tests and testing the operating effectiveness of the entity’s internal
control
C. Identifying business risk relevant to financial reporting objectives and deciding about actions
to address those risks
 D. Discussing with the members of the audit team the susceptibility of the entity’s financial
statements to material misstatements

13. PSA 315 requires the auditor to obtain an understanding of the internal control relevant to the
audit. The auditor uses the understanding of internal control to
A B C D
Identify the types of potential misstatements Yes Yes No No
Consider factors that affect the risk of Yes No Yes No
material misstatements
Design the nature, timing and extent of Yes Yes Yes No
further audit procedures
Obtain knowledge about the operating effectiveness No Yes Yes No
of the internal control

14. As defined in PSA 500, __________ is an individual or organization possessing the expertise in a
field other than accounting or auditing, whose work in that field is used by the entity to assist the
entity in preparing the financial statements.
A. Auditor’s expert
B. Auditor’s external expert
C. Auditor’s internal expert
D. Management expert

15. PSA 501 states that inventory is material to the financial statements; the auditor should obtain
sufficient appropriate audit evidence regarding its existence and condition by attendance at
physical inventory counting unless impracticable. Which of the following statements concerning
this audit procedures is incorrect?
A. Regardless of the inventory system operated by the client, an annual physical count must be
made of each item in the inventory, and test counts must be made by the auditor
B. Inventories located in public warehouses may be verified by direct confirmation on writing
from the custodians, provided that, depending on the materiality of these inventories,
additional procedures are applied as deemed necessary
C. When the well-kept perpetual inventory records are checked by the client periodically by
comparisons with physical counts, the auditor’s observation procedures usually can be
performed either during or after the end of the period under audit
D. The independent auditor, when asked to audit financial statements covering the current
period and one or more periods for which he/she had not observed or made some physical
counts, may be able to become satisfied as to such prior activities through appropriate
alternative procedures

16. For initial engagements, PSA 510 does not require the auditor to obtain sufficient audit evidence:
A. That the prior period financial statements were audited by an independent CPA
B. That the opening balances do not contain material misstatements that materially affect the
current period’s financial statements
C. That the prior periods ending balances have been correctly brought forward to the current
period or, when appropriate, have been restated
 D. That appropriate accounting policies are consistently applied or changes in accounting
policies have been properly accounted for and adequately disclosed

17. To comply with the requirement of PSA 520, analytical procedures should be applied in
A. Planning and testing phases of the audit
B. The testing and overall review stages of the audit
C. The planning and overall review stages of the audit
D. The planning testing and overall review stages of the audit

18. PSA 520 states that analytical procedures can be used in the:
A B C D
Planning stage Yes Yes Yes No
Testing phase Yes No No Yes
Overall review stage Yes Yes No No

19. PSA 520 requires auditors to use analytical procedures in the:

A B C D
Planning stage Yes Yes Yes No
Testing phase Yes No No Yes
Overall review stage Yes Yes No No

20. According to PSA 520, the process of dividing the population into sub-population is called
A. Division C. Random selection
B. Projection D. Stratification

21. In the context of PSA 600, (Revised and Redrafted), a group:

A. May have more than one component
B. May consist entirely of one component
C. Always has more than one component
D. Cannot be determined without additional information

22. According to PSA 700 Revised, the following are the Elements of the Standard Audit Report except
A. Addressee C. Explanatory paragraph
B. Auditor’s address D. Introductory paragraph

23. Reference to “financial statements” in PSA 700 (Redrafted), Forming an Opinion and Reporting on
Financial Statements, means
A. A complete set of general-purpose financial statements, including the related notes
B. A complete set of financial statements prepared in accordance with a special purpose
framework
C. A complete set of financial statements prepared to meet the financial information needs of
specific users
D. A complete set of financial statements prepared in accordance with either a general or special
purpose framework
24. PSA 800 “the auditor’s report on special purpose audit engagements” does not apply to a
A. Audit of financial statements prepared in accordance with GAAP in the Philippines
B. Reports on summarized financial statements derived from annual audited financial
statements
C. Audit engagement that involves expression of an opinion on one or more components of the
financial statements
D. Audit of financial statements prepared in accordance with the cash receipts and cash
disbursement basis of accounting

25. Which of the following is not a special purpose audit engagement as provided by PSA 800?
A. Reports on prospective financial statements
B. Reports on summarized financial statements
C. Reports on components of financial statements
D. Reports on financial statements prepared using other comprehensive basis of accounting

26. PAPS 1000PH focuses on the instances when:

A. The scope limitation is improved by the client or by circumstances
B. The documents or information exist but are not made available to the auditor
C. A particular audit procedure is beyond the competence or area or expertise of the auditor
D. Scope limitations occur due to the inability of the client to prepare schedules, reports or
computations or the failure to reconcile differences noted in the audit due to the poor
condition of the accounting records