TEST I - Matching Type

Instruction: The following are related standards in audit responsibility, process and planning. Please Match Column A
with the corresponding item in column B. Write the letter of your answer for each number.

E 1. PSA 520 (Redrafted) A. Consideration of Laws and Regulations in an Audit of

Financial Statements (including Related Conforming
Amendments to Other Philippine Standards)
F 2. PSA 240 (Redrafted) B. Agreeing the Terms of Audit Engagements
J 3. PSA 200 (Revised and Redrafted) C. Planning an Audit of Financial Statements
C 4. PSA 300 (Redrafted) D. Identifying and Assessing the Risks of Material
Misstatements
D 5. PSA 315 (Revised 2019) E. Analytical Procedures
A 6. PSA 250 (Revised) F. The Auditor's Responsibility to Consider Fraud in an Audit
of Financial Statements
H 7. PSA 320 (Revised and Redrafted) G. Audit Evidence
B 8. PSA 210 (Redrafted H. Materiality in Planning and Performing on Audit
G 9. PSA 500 (Redrafted) I. The Auditor’s Responses to Assessed Risks
I 10. PSA 330 J. Overall Objectives of the independent auditor and the
conduct of an audit in accordance with international
standards on Auditing.

Test II - Identification

Instruction: The following are Fraud risk factors Relating to Misstatements in accordance with PSA 240. Please classify
the Fraud risk factors resulting from, just write the capital letter that corresponds with the correct answer.

MA - Misappropriation of Assets FFR - Fraudulent Financial Reporting

FFR 1. New accounting, statutory, or regularony requirements

MA 2. Large amounts of cast on hand or processed.
MA 3. Inventory items that are small in size, of high value, or in high demand.
MA 4. Easily convertible assets, such as bearer bonds, diamonds, or computer chips.
MA 5. Fixed assets which are small in size, marketable, or lacking observable identification of ownership
MA 6. Inadequate segregation of duties or independent checks.
MA 7. Inadequate oversight of senior management expenditures, such as travel and other reimbursements
MA 8. Inadequate management oversight of employees responsible for assets, for example, inadequate supervision or
monitoring of remote locations.
MA 9. Inadequate job applicant screening of employees with access to assets.
MA 10. Inadequate record keeping with respect to assets.
MA 11. Inadequate system of authorization and approval of transactions (for example, in purchasing).
MA 12. Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
FFR 13. High degree of competition or market saturation, accompanied by declining margins.
FFR 14. High vulnerability to rapid changes, such as changes in technology, product obsolescence, or interest rates.
FFR 15. Significant declines in customer demand and increasing business failures in either the industry or overall
economy.
FFR 16. Operating Losses making the threat of bankruptcy, foreclosure, or hostile takeover imminent.
MA 17. Behavior indicating displeasure or dissatisfaction with the entity or its treatment of the employee.
MA 18. Changes in behavior or lifestyle that may indicate assets have been misappropriated.
MA 19. Tolerance of petty theft.
MA 20. Lock of timely and appropriate documentation of transactions, for example, credits for merchandise returns.
MA 21. Lack of mandatory vacations for employees performing key control functions.
MA 22. Disregard for the need for monitoring or reducing risks related to misappropriations of assets.
MA 23. Disregard for internal control over misappropriation of assets by overriding existing controls or by failing to correct
known internal control deficiencies.
FFR 24. Recurring negative cash flows from operations or an inability to generate cash flows from operations while
reporting earnings and earnings growth
FFR 25. Rapid growth or unusual profitability especially compared to that of other companies in the same industry.
MA 26. Lack of complete and timely reconciliations of assets.

Test III - Multiple Choice

GENERAL INSTRUCTIONS: Select the BEST answer for each of the following questions just encircle the letter of your
choice. Mark only one answer. NO ERASURES ARE ALLOWED

FRAUD AND ERROR

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

a. Company management changes inventory count tags and overstates ending inventory, while understating cost of
goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense
account , thus overstating expenses.
c. An employee steals inventory and the “shrinkage” is recorded in cost of goods sold.
d. An employee steals small tools from the company and neglects to return them; the cost is reported as a
miscellaneous operating expense.
2. Which of the following best describes what is meant by the term “fraud risk factor?”
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presence often have been observed in circumstances where frauds have occurred.
c. Factors whose presence requires modification of planned audit procedures.
d. Material weaknesses identified during and audit.

3. Which of the following is correct concerning requirements about auditor communications about fraud?
a. Fraud that involves senior management should be reported directly to the audit committee regardless of the
amount involved.
b. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities
and Exchange Commission.
c. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through use
of an "emphasis of a matter" paragraph added to the audit report.
d. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

4. When performing of a financial statement audit, auditors are required to explicitly assess the risk of material
misstatement due to
a. Errors
b. Fraud
c. Illegal acts
d. Business risk

5. An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected for all of the
following except
a. Employee collusion
b. Falsified documentation
c. Need to apply professional judgment in evaluating fraud risk factors
d. Profesionnal skepticism

6. The following relates to auditor's responsibilities to fraud in an audit of financial statements in accordance with PSA
240.
Statement I - Misstatements in the financial statements can arise from either fraud or error. The distinguishing factor
between fraud and error is whether the underlying action that results in the misstatement of the financial statements is
intentional or unintentional.
Statement II - Although fraud is a broad legal concept, for the purposes of the PSAs, the auditor is concerned with fraud
that causes a material statement in the financial statements.
Statement III - Two types of intentional misstatements are relevant to the auditor, misstatements resulting from fraudulent
financial reporting and misstatements resulting from misappropriation of assets. Although the auditor may suspect or, in
rare cases, identify the occurrence of fraud, the auditor does not make legal determinations of whether fraud has actually
occurred.
Statement IV - An auditor conducting an audit in accordance with PSAs is responsible for obtaining reasonable
assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or
error.
Statement V - The risk of the auditor not detecting a material misstatement resulting from management fraud is lesser
than for employee fraud, because management is frequently in a position to directly or indirectly manipulate accounting
records, present fraudulent financial information or override control procedures designed to prevent similar frauds by other
employees.
Statement VI - When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of
professional skepticism throughout the audit, considering the potential for management override of controls and
recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud.

a. True, False, True, True, False, True c. True, False, True, False, True, False
b. False, False, False, False, False, False d. False, True, False, False, True, False

AUDIT RISK

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

a. Reduce substantive testing by relying on the assessments of inherent risk and control risk.
b. Postpone the planned timing of substantive tests from interim dates to the year-end.
c. Eliminate the assessed level of inherent risk from consideration as a planning factor.
d. Lower the assessed level of control risk from the maximum level to below the maximum.

8 The risk that an auditor will conclude, based on substantive tests, that a material misstatement does not exist in an
account balance when, in fact, such misstatement does exist is referred to as .
a. Sampling risk
b. Detection risk.
c. Nonsampling risk.
d. Inherent risk.

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

10. Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor's discretion.
11. 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. Decrease substantive testing.

b. Decrease detection risk.
c. Increase inherent risk.
d. Increase materiality levels.

12 Relationship between control risk and detection risk is ordinarily

a. Parallel.
b. Inverse.
c. Direct.
d. Equal

13. This pertains to a system that traces detailed transactions relating to an item in the accounting record.
a. Audit Trail
b. Evidence
c. Internal Controls
d. Systems

MATERIALITY

14. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about
materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity's annualized interim financial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.

15. Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are important for fair presentation of financial statements
in conformity with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements
that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative
and qualitative judgments.
d. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable
person who will rely on the financial statements.

16. Which of the following is correct concerning performance materiality on an audit?

a. It will ordinarily be less than financial statement materiality.
b. It should be established at beginning of an audit and not be revised thereafter.
c. It should be established at separate amounts for the various financial statements.
d. It need not be documented in the working papers.

17. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about
materiality?
a. The results of the initial assessment of control risk..
b. The anticipated sample size for planned substantive tests.
c. The entity's financial statements of the prior year.
d. The assertions that are embodied in the financial statements.

18. Holding other planning considerations equal, a decrease in the amount of misstatement in a class of transactions that
an auditor could tolerate most likely would cause the auditor to
a. Apply the planned substantive tests prior to the balance sheet date.
b. Perform the planned auditing procedures closer to the balance sheet date.
c. Increase the assessed level of control risk for relevant financial statement assertions.
d. Decrease the extent of auditing procedures to be applied to the class of transactions.

19 Which of the following is a function of the risks of material misstatement and detection risk?
a. Internal control.
b. Corroborating evidence
c. Quality control.
d. Audit risk

20 Consider the following statements and choose the best answer.

Statement I - Materiality is directly related to Audit Risk, the more material the account balance or transaction is, the
higher the Audit Risk is needed; hence, more substantive test is needed and vice versa
Statement II - Materiality is Directly related to Detection risk; the more material the account balance or transaction is the
lower detection risk is present.
a. Both statements are incorrect
b. Both statements are correct
c. Only one statement is incorrect
d. Only one statement is correct
AUDIT PLANNING

21. Which of the following would be least likely to be considered an audit planning procedure?
a. Use an engagement letter.
b. Develop the overall audit strategy.
c. Perform risk assessment.
d. Develop the audit plan.

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

23. Before accepting an engagement to audit a new client, a CPA is required to obtain
a. An understanding of the prospective client's industry and business.
b. The prospective client's signature to the engagement letter.
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.

24. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor
regarding
a. Disagreements the predecessor had with the client concerning auditing procedures and accounting principles.
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. The predecessor's assessments of inherent risk and judgments about materiality.

25. … a client regarding the services to be performed for each engagement. This understanding generally includes
a. Management's responsibility for errors and the illegal activities of employees that may cause material
misstatement.
b. The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies in internal
control that come to the auditor's attention.
c. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due
to fraud.
d. The auditor's responsibility for determining preliminary judgments about materiality and audit risk factors.

26. Which of the following matters is generally included in an auditor's engagement letter?
a. Management's responsibility for the entity's compliance with laws and regulations.
b. The factors to be considered in setting preliminary judgments about materiality.
c. Management's vicarious liability for illegal acts committed by its employees.
d. The auditor's responsibility to search for significant internal control deficiencies

27. During the initial planning phase of an audit, a CPA most likely would
a. Identify specific internal control activities that are likely to prevent fraud.
b. Evaluate the reasonableness of the client's accounting estimates.
c. Discuss the timing of the audit procedures with the client's management.
d. Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion.

28. Which of the following statements would least likely appear in an auditor's engagement letter?
a. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses.
b. During the course of our audit we may observe opportunities for economy in, or improved controls over, your
operations.
c. Our engagement is subject to the risk that material misstatements or fraud, if they exist, will not be detected.
d. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider
necessary to complete the engagement.

29. Which of the following documentation is not required for an audit in accordance with generally accepted auditing
standards?
a. A written audit plan setting forth the procedures necessary to accomplish the audit's objectives.
b. An indication that the accounting records agree or reconcile with the financial statements.
c. A client engagement letter that summarizes the timing and details of the auditor's planned fieldwork.
d. The assessment of the risks of material misstatement.

30. PSA 315 requires that the auditors must obtain sufficient understanding of the entity and its environment including its
internal control. The following are the minimum requirements needed in understanding the entity except:
a. Industry, regulatory, and other external factors, including financial reporting framework
b. Amount of outstanding debt of the Company
c. Measurement and review of the entity's performance
d. Internal controls

31 Consider the following statements and choose the correct answer.

Statement I - Detection Risk is directly related to Audit Risk, the higher the detection risk, the higher the audit risk and
vice versa
Statement II - Risk of Material Misstatement (RMM) is Inversely related to Detection Risk, the higher the RMM the lower
the Detection Risk needed
a. Both statements are true
b. Both statements are false
c. Only statement I is true
d. Only statement II is false