PSA CHALLENGE #6

NAME:______________________________ SCORE:____________________

1. The Code of Ethics is mandatory to all CPAS and is applicable to services performed in the
Philippines on or after
a. January 1, 2004 c. July 1, 2004
b. January 1, 2005 d. July 1, 2005
2. The Philippine Institute of CPAs (PICPA) being a member of the International Federation of
Accountants (IFAC), is obligated to support the work of IFAC by informing its members of every
pronouncement of IFAC, including adoption of the IFAC Code of Ethics as recommended by the
Board of Accountancy and approved by PRC. Modifications, however were made to consider
Philippine regulatory requirements and circumstances. Which of the following is not a modification
made to IFAC Code of Ethics?
a. The term “corporation” was deleted from the definitions
b. The period of rotation of the lead engagement partner was changed from seven to five years
c. The phrase “who are certified public accountants and who hold a valid certificate issued by
the Board of Accountancy” was added in the definition of professional accountant
d. The paragraph on advertising and solicitation was modified to include advertisements on
newspapers of national circulation.
3. Which of the following is incorrect regarding public interest?
a. The accountancy profession’s public consists of clients, credit grantors, government,
employers, employees, investors, the business and financial community, and others who who
rely of the objectivity and integrity of the professional accountant
b. A professional accountant’s responsibility is exclusively to satisfy the needs of an individual
client or employer.
c. A distinguishing mark of a profession is acceptance of its responsibility to the public
d. Public interest is the collective well-being of the community of people and institutions the
professional accountants serve.
4. Which of the following is not a basic need to be met by the observance of the Code of
Ethics?
a. Credibility c. Quality of Services
b. Professionalism d. Commitment
5. The fundamental principles that a professional accountant has to observe are as follows,
except
a. Integrity c. loyalty
b. professional behavior d. professional competence and due care
6. Financial interest means
a. Any bank account which is used solely for the banking of clients’ monies.
b. Any monies received by a professional accountant in public practice to be held or paid out on the
instruction of the person from whom or on whose behalf they are received.
c. Financial interest beneficially owned through a collective investment vehicle, estate, trust or
other intermediary over which the individual or entity has no control.
d. An interest in an equity or other security, debenture, loan or other debt instrument of an entity,
including rights and obligations to acquire such an interest and derivatives directly related to
such interest.
7. Which of the following is not acceptable under the Code of Ethics?
a. An appointment of a professional accountant in a matter of national importance was
publicized.
b. A professional accountant writes a letter to another professional accountant seeking
employment or professional business.
c. A professional accountant is listed in a directory that could reasonably be regarded as a
promotional advertisement for those listed therein.
d. A professional accountant who authored an article on professional subject, stated his
name and professional qualifications and gave the name of his organization.

Call or visit: Cebu CPAR-PRTC @tel. nos. (032) 345-0553 or website: http://www.cebu-cpar.com
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8. Which of the following is incorrect regarding professional competence?

a. Professional accountants should not portray themselves as having expertise or experience
which they do not possess.
b. A period of relevant work experience contributes to attainment of professional competence
c. Maintenance of professional competence requires continuing awareness of developments in
the accountancy profession
d. Professional competence is divided into three phases, attainment of competence, certification
as CPA, and maintenance of competence
9. The following statements regarding confidentiality are false, except.
a. The duty of confidentiality ceases at the end of the relationship between the professional
accountant and the client or employer.
b. Confidentiality should always be maintained by a professional accountant unless specific
authority has been given to disclose information or there is a legal or professional duty to
disclose
c. Professional accountants does not have to ensure that their staff respect the principle of
confidentiality
d. When the professional accountant has determined that confidential information can be
disclosed, he may communicate such information whether orally or in writing
10. A professional accountant may be associated with tax return that
a. Contains a false or misleading statement.
b. Contains statements or information furnished recklessly or without any real knowledge
of whether they are true or false.
c. Omits or obscures information required to be submitted and such omission or obscurity
would mislead the revenue authorities.
d. Uses of estimates if such use is generally acceptable or if it is impractical under the
circumstances to obtain exact data.

11. Which of the following is incorrect regarding the professional accountants’ tax practice?
a. A professional accountant rendering professional tax services is entitled to put forward
the best position in favor of a client, or an employer.
b. Doubt may be resolved in favor of the client or the employer if there is reasonable
support for the position.
c. A professional accountant may hold out to a client or an employer the assurance that the
tax return prepared and the tax advice offered are beyond challenge.
d. Professional accountants should ensure that the client or the employer are aware of the
limitations attaching to tax advice and services so that they do not misinterpret an expression of
opinion as an assertion of fact.

12. When a professional accountant performs services to another country and differences
exist between ethical requirements of the two countries, the following should be applied, except:
a. When the ethical requirements of the country in which the services are being performed are less
strict than the Code of Ethics of the Philippines, then the Code of Ethics of the Philippines
should be applied.
b. When the ethical requirements of the country in which services are being performed are stricter
than the Code of Ethics of the Philippines, then the ethical requirements in the country where
services are being performed should be applied.
c. When the ethical requirements of the country in which services are being performed are
mandatory for services performed by professionals from another country but are less strict, then
the ethical requirements of the country in which services are being performed should be applied.
d. When the ethical requirements of the home country are mandatory for services performed
outside that country and are stricter, then the ethical requirements of the home country should be
applied

13. The avoidance of facts and circumstances that are so significant that a reasonable and
informed third party, having knowledge of all relevant information, including safeguards applied,
would reasonably conclude a firm’s, or a member of the assurance team’s integrity, objectivity or
professional skepticism had been compromised:
a. professional competence c. independence in appearance
b. independence in fact d. professional behavior
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14. Which of the following is incorrect regarding independence?

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

15. For assurance engagements provided to an audit client, the following should be independent of the
client
a b c d
 The members of the assurance team Yes Yes Yes Yes
 The firm Yes Yes No No
 Network firms Yes No No Yes

16. Independence is potentially affected by self-interest, self-review, advocacy,

familiarity and intimidation threats. Which of the following least likely creates a threat to
independence?
a. a direct financial interest or material indirect financial interest in an assurance client
b. potential employment with a client
c. a member of the assurance team being a former director or officer of the assurance client
d. a loan obtained from a client which is a financial institution and was ade under normal
lending procedures, terms and requirements

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

18. Examples of circumstances that may create self-review threat least likely include
a. Preparation of original data used to generate financial statements or preparation of other
records that are the subject matter of the assurance engagement.
b. A member of the assurance team being, or having recently been, an employee of the
assurance client in a position to exert direct and significant influence over the subject matter of
the assurance engagement.
c. Performing services for an assurance client that directly affect the subject matter of the
assurance engagement.
d. Potential employment with an assurance client.

19. A former officer, director or employee of the assurance client serves as a member of the assurance
team. This situation will least likely create
a. Self-interest threat c. Intimidation threat
b. Self-review threat d. Familiarity threat

20.`The firm, or a network firm, may provide an audit client that is not a listed entity with accounting
and bookkeeping services, including payroll services, of a routine or mechanical nature, provided
any self-review threat created is reduced to an acceptable level. Examples of such services least
likely include:
a. Recording transactions for which the audit client has determined or approved the
appropriate account classification.
b. Posting coded transactions to the audit client’s general ledger.
c. Preparing financial statements based on information in the trial balance.
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d. Determining and posting journal entries without obtaining the approval of the audit
client.
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21. Certain corporate finance services may create advocacy or self-review threats;
however, safeguards may be available to reduce these threats to an acceptable level. Examples of
such services include the following, except
a. Committing the assurance client to the terms of a transaction or consummating a transaction on
behalf of the client.
b. Assisting a client in developing corporate strategies.
c. Assisting in identifying or introducing a client to possible sources of capital that meet the client
specifications or criteria.
d. Providing structuring advice and assisting a client in analyzing the accounting effects of
proposed transactions.

22. Safeguards available to eliminate threats to independence include safeguards

created by the profession, legislation or regulation, safeguards within the assurance client and
safeguards within the firm. Which of the following is least likely a safeguard within the assurance
client?
a. Continuing education requirements
b. Employment of competent employees to make managerial decisions
c. Effective internal control system in place
d. A corporate governance structure, such as an audit committee that oversees and
communicates about the firm’s services

23. Safeguards within the firm’s own systems and procedures, include the
following, except
a. Firm leadership that stresses the importance of independence and the expectation that members
of assurance teams will act in the public interest.
b. External review of a firm’s quality control system.
c. Policies and procedures to implement and monitor quality control of assurance engagements
d. Policies and procedures that will enable the identification of interests or relationships between
the firm or members of the assurance team and assurance clients.

24. Advertising, as defined in the Code of Ethics, means

a. The communication to the public of facts about a professional accountant which are not
designed for the deliberate promotion of that professional accountant.
b. The approach to a potential client for the purpose of offering professional services.
c. The communication to the public of information as to the services or skills provided by
professional accountants in public practice with a view to procuring professional business.
d. Any of the above.

25. Which statement is incorrect regarding employed professional accountants?

a. ployed professional accountants owe a duty of loyalty to their employer as well as to the
profession, therefore there may be no time that the two will be in conflict.
b. A professional accountant, particularly one having authority over others, should give due weight
for the need for them to develop and hold their own judgment in accounting matters and should
deal with difference of opinion in a professional way.
c. When undertaking significant tasks for which a professional accountant has not had sufficient
specific training or experience, he or she should not mislead the employer as to the degree of
expertise or experience he or she possesses, and where appropriate, expert advice and assistance
should be sought.
d. A professional accountant is expected to present financial information fully, honestly and
professionally and so that it will be understood in its context.

26. Shall constitute in a person who holds, or is appointed to, a position in

accounting professional group in government or in a government-owned and/or controlled
corporation, including those performing propriety functions, where decision making requires
professional knowledge in the science of accounting.
a. Practice in public accountancy c. Practice in academe
b. Practice in commerce and industry d. Practice in government

27. Which of the following is not a required qualification to be a member of the

Board of Accountancy?
a. must be a natural born citizen and a resident of the Philippines
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b. must be a duly registered Certified Public Accountant with at least 12 years of experience
c. must not be a director of PICPA at the time of appointment
d. must be of good moral character
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28. A certificate under seal issued by the Professional Regulation Commission upon
the recommendation of the Board attesting that the individual is allowed to practice public
accountancy in the Philippines
a. certificate of accreditation c. certificate of appreciation
b. certificate of registration d. certificate to practice

29. A member of the Board shall be appointed following nomination by ________

and recommendation by _____ to the President not later than 60 days prior to the expiry of the term
of any member.
a. PICPA and PRC respectively c. ASC and PRC respectively
b. PRC and PICPA respectively d. ASPC and PRC respectively

30. A member of the Board of Accountancy who had served the Board for two successive terms is not
eligible for reappointment until the lapse of 1 year. Provided that no member shall serve the Board
for more than
a. 6 years c. 10 years
b. 9 years d. 12 years

31. When a CPA has been accredited by the BOA and PRC in May 2006, such accreditation will expire
a. May 31, 2008 c. June 30, 2008
b. September 30, 2008 d. December 31, 2008

32. The Auditing and Assurance Standards Council (AASC) shall be composed of ____ members with a
chairman
a. 17 c. 15
b. 16 d. 14

33. In the absence of pronouncements issued by the AASC and the PICPA, published statements and
guidelines by other authoritative bodies, like AICPA, IAPC and AFA are the basis of determining
generally accepted auditing standards. What effect do these pronouncements provide in determining
the generally accepted auditing standards?
a. Authoritative b. Persuasive c. Alternative d. Parallel

34. The following statements relate to CPA examination ratings. Which statement is incorrect?
a. To pass the examination, candidates should obtain a general weighted average of 75% and
above, with no rating in any subject less than 65%.
b. A candidate who does not meet the passing average and minimum grade requirement, but had
obtained a rating of 75% and above in at least four subjects shall receive a conditional credit for
the subjects passed.
c. Candidates who fail in two complete CPA examinations shall be disqualified from taking another
set of examination unless he submits evidence that he has enrolled and completed at least 24
units of subjects given in the board exam
d. Conditioned candidates shall take an examination in the remaining subjects within one year from
the preceding examination.

35. Which of the following is incorrect regarding the “meaningful experience” required in the
accreditation of a CPA.
a. Meaningful experience in academe is considered if the CPA taught for at least three
trimesters or two(2) consecutive semesters subjects in either financial accounting, business law
and tax, auditing problems, auditing theory, financial management and management services
b. Meaningful experience in public practice shall include at least 2 years as audit assistant and 1
year as auditor in charge
c. Meaningful experience in government sector shall include significant involvement in general
accounting, budgeting, tax administration, internal auditing, liaison with the Commission on
Audit or any other audit services
d. Meaningful experience in commerce and industry shall include significant involvement in
general accounting, budgeting, tax administration, internal auditing, liaison with external
auditors, representing his/her employer before government agencies on tax and matters related to
accounting or any other related functions
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36. Application for initial registration/accreditation shall be subject to a fee of

a. P1,000 c. P5,000
b. P2,000 d. P10,000

37. Which of the following about Continuing Professional Education (CPE) is incorrect?
a. The total CPE credit units for registered accounting professionals shall be 60 credit units for
3 years
b. The minimum credit units for each year shall be 15 credit units and any excess credit units
may be carried over the succeeding years within the three year period.
c. A registered professional shall be permanently exempted from CPE requirements upon
reaching the age of 65 years old.
d. A registered professional who is working or practicing his/her profession or furthering
his/her studies abroad shall be temporarily exempted from compliance with CPE requirements
during the period of his/her stay abroad provided that he/she has been out of the country for at
least five(5) years immediately prior to the date of renewal.

38. Factors relevant to the assessment of inherent risk for the development of the overall plan
may include the risk of material misstatement of the financial statements due to environmental
matters
a. environmental performance c. environmental matters
b. environmental risk d. environmental audit

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

40. What quality control objective requires that each professional must be evaluated on every
engagement?
a. Supervision. c. Monitoring.
b. Advancement. d. Direction.

41. The quality control requiring the partner tests the quality control procedures at least annually.
Which quality control objective requires the foregoing procedure?
a. Acceptance and continuance of clients. c. Consultation.
b. Supervision. d. Monitoring.

42. Solicitation consists of the various means that CPA firms use to acquire new clients. Which one of
the following would not be an example of solicitation?
a. accepting new clients that approach the firm.
b. taking prospective clients to lunch.
c. offering seminars on current tax law changes to potential clients.
d. advertisements in the yellow pages of a phone book.

43.What is the objective of monitoring as an element of quality control policies of a firm?

a. To provide reasonable assurance that the firm’s other quality control policies and procedures are
effectively operating.
b. To evaluate prospective clients and for their approvals as clients.
c. To ensure that personnel are sufficiently directed, supervised and their work being reviewed
adequately.
d. To have reasonable assurance that right personnel is assigned to an audit engagement.

44. Which of the following statements does not properly describe an element of the theoretical
framework of auditing?
a. The data to be audited can be verified.
b. Short-term conflicts may exist between managers who prepare data and auditors who examine
the data.
c. Auditors act on behalf of management.
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d. An audit benefits the public.
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45. Which of the following statements does not properly describe a limitation of an audit?
a. Many audit conclusions are made on the basis of examining a sample of evidence.
b. Some evidence supporting peso representations in the financial statements must be obtained by
oral or written representations of management.
c. Fatigue and carelessness can cause auditors to overlook pertinent evidence.
d. Many financial statement assertions cannot be audited.

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

47. An external audit

a. supports an internal audit c. overlaps an internal audit
b. duplicates an internal audit d. complements an internal audit

48. The third generally accepted auditing standard require that due professional care should
be exercised in the performance of the examination and the preparation of the report. The matter of
due professional care deals with what is done by the independent auditor and how well it is done.
For example, due care in the matter of working paper preparation requires that working paper
a. format be neat and orderly
b. content be sufficient to provide support for the auditor’s report, including the auditor’s
representation as to compliance with auditing standards
c. ownership be determined by the legal statutes
d. preparation be the responsibility of assistant accountants whose work is reviewed by senior
accountant

49. Which of the generally accepted auditing standards of reporting would not normally
apply to special reports such as cash-basis of reporting?
a. First standard c. Third standard
b. Second standard d. Fourth standard

50. Which of the following best describes the element of relative risk which underlies the
application of generally accepted auditing standards, particularly the standards of field work and
reporting?
a. Cash audit work may have to be carried out in more conclusive manner than inventory audit
work.
b. Intercompany transactions are usually subject to a less detailed scrutiny than arms-length
transactions with outside parties.
c. Inventories may require more attention by the auditor on an engagement for merchandising
concern than an engagement for a public utility.
d. The scope of the examination need not be expanded if errors arouse suspicion of fraud and are of
relatively insignificant amounts.

51. Audit matters of governance interest are those that arise from the audit of financial statements and,
in the opinion of the auditor, are both important and relevant to those charged with governance in
overseeing the financial reporting and disclosure process and includes the following, except
a. The general approach and overall scope of the audit, including any expected limitations thereon,
or any additional requirements
b. Audit adjustments recorded by the entity that have, or could have, a significant effect on the
entity’s financial statements
c. The selection of, or changes in, significant accounting policies and practices that have, or
could have, a material effect on the entity’s financial statements
d. Expected modifications of the auditor’s report
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52. The following are valid reasons why an auditor sends to his client an engagement letter:

A B C D
Avoid misunderstanding with respect to engagement Yes Yes No Yes
Confirms the auditor’s of the appointment Yes Yes Yes No
Objective and scope of the audit Yes Yes Yes Yes
Assures CPA’s compliance to GAAS Yes No No Yes
53. Engagement letters are widely used in practice for professional engagements of all types.
The primary purpose of the engagement letter is to:
a. remind management that the primary responsibility for the financial statements rests with the
management.
b. satisfy the requirements of the CPA’s liability policy.
a. provide a starting point for the auditor’s preparation of the preliminary audit program.
b. provide a written record of the agreement with the client as to the services to be rendered.

54. Which of the following is not a procedure that can be performed by the CPA when the client
requests for a change in the nature of engagement
a. consider whether the reasons for change of engagement are reasonable
b. withdraw from the engagement
c. issue an adverse opinion
d. issue an opinion appropriate for the revised engagement

55. A common way for a CPA firm to demonstrate its defense of a lack of duty to perform is by use of
a(n)
a. representation letter c. engagement letter
b. expert witness d. confirmation letter

56. Before accepting an engagement to audit a new client, an auditor is required to

a. make inquiries of the predecessor auditor after obtaining the consent of the prospective client
b. obtain the prospective client’s signature to the engagement letter
c. prepare a memorandum setting forth the staffing requirements and documenting the preliminary
audit plan
d. discuss the management representation letter with the prospective client’s audit committee

57. Which of the following best describes what is meant by “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. Reportable conditions identified during the audit

58. Which of the following is a fraud risk factor relating to industry conditions?
a. Overly complex accounting system
b. Lack of procedures to screen job applicants for positions where employees have access to assets
susceptible to misappropriation.
c. A high degree of competition or market saturation, accompanied by declining margins.
d. Management is dominated by a single person or a small group without compensating
controls such as effective oversight by those charged with governance.

59. Which of the following acts are considered fraud?

I. Alteration of records or documents
II. Misinterpretation of facts
III. Misappropriation of assets
IV. Recording of transactions without substance e
V. Clerical mistakes

a. III only
b. I and III only
c. I, III and IV only
d. All of them
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60. The auditor-in-charge of engagement assesses risk of fraud higher than the average. The prudent
auditor is expected to
a. Assign more experienced auditors to the engagement.
b. Assign a more members to the engagement.
c. Make a more extensive tests of controls.
d. Raise the materiality level.

61. In assessing potential for fraud, the following are either likely or unlikely to increase risk of
misstatement of financial statements. Which of the following combinations best describes the
likelihood of potential for fraud?
A B C D
Undue emphasis is placed on meeting projections L U L U
Operating, financing and investing activities are L U U U
made by different respective committees
Reputation of management is poor L L L U

62. The following significant audit finding on the audit of a bank should be reported
within 30 calendar days of discovery by the independent auditor to the Bangko Sentral ng Pilipinas,
except
a. Material fraud or irregularity.
b. Potential losses, the aggregate of which amounts to at least one percent of the bank
capital funds.
c. Any finding to the effect that the total bank assets, on a going concern basis, are no
longer adequate to cover the total claims of the creditors.
d. Scope limitation whether imposed by the bank or due to circumstance.

63. When an auditor becomes aware of information concerning possible noncompliance to laws and
regulations, the auditor should appropriately
a. obtain an understanding of the nature of the act and the circumstances in which it has occurred,
and evaluate the possible effect on the financial statements
b. discuss his suspicions with management
c. ask management to determine whether a violation is really committed
d. consult with the entity’s legal counsel as to what appropriate action the auditor should do

64. Which of the following is incorrect regarding communication of fraud and client’s non-compliance
with laws and regulations
a. The auditor’s professional duty to maintain the confidentiality of client information
ordinarily precludes reporting fraud and error to a party outside the client entity
b. Communication of misstatements resulting from fraud to management and to those charged
with governance is required when the auditor identified fraud whether or not this results in a
material misstatement in the financial statements
c. Communication of misstatements resulting from fraud to management and to those charged
with governance is required when the auditor obtained evidence that indicates that fraud may
exist (even if the potential effect on the financial statements would not be material)
d. The auditor should communicate information regarding fraud or client’s non-compliance
with laws to a proposed successor auditor whether or not the client authorizes disclosure.

65. Which of the following is an inappropriate action of the auditor when he concludes that it is not
possible to continue performing the audit as a result of a misstatement resulting from fraud or
suspected fraud?
a. consider the professional and legal responsibilities applicable in the circumstances, including
whether there is a requirement for the auditor to report to the person or persons who made the
audit appointment or, in some cases, to regulatory authorities
b. consider the possibility of withdrawing from the engagement
c. consider whether there is a professional or legal requirement to report to the person or persons
who made the audit appointment or, in some cases, to regulatory authorities, the auditor’s
withdrawal from the engagement and the reasons for the withdrawal
d. consider issuance of an adverse opinion
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66. The development of a general strategy and a detailed approach for the expected nature, timing, and
extent of audit refers to:
a. Supervision c. Audit Procedures
b. Directing d. Planning

67. An auditor obtains knowledge about a new client’s business and its industry to
a. Make constructive suggestions concerning improvements to the client’s internal control structure
b. Understand the events and transactions that may have an effect on the client’s financial
statements
c. Develop an attitude of professional skepticism concerning manage4ment’s financial statement
assertion
d. Evaluate whether the segregation of known misstatements causes the financial statements taken
as a whole to be materially misstated

68. Which of the following is the ultimate concern of the knowledge about the business?
a. Consideration of how it affects the financial statements taken as a whole.
b. Assists the auditor in enforcing quality control procedures.
c. To assure that sufficient audit evidence is obtained.
d. It assists in determining the type of audit report to be issued.

69. The auditor is not expected to have

a. A particular knowledge of the economy and the industry within which the entity operates.
b. A particular knowledge of how the entity operates.
c. A level of knowledge of business ordinarily less than that possessed by management.
d. A knowledge of business which is used in assessing inherent and control risk.

70. It provides a threshold or cutoff point rather than being a primary qualitative characteristic which
information must have if it is to be useful.
a. Materiality c. Relevance
b. Reliability d. Misstatement

71. Which of the following is incorrect regarding materiality

a. The assessment of what is material is a matter of professional judgment
b. The auditor needs to consider the possibility of misstatements of relatively small amounts,
that, cumulatively, could have a material effect on the financial statements
c. When the auditor determines that the acceptable materiality level is higher, audit risk should
be increased
d. The aggregate of uncorrected misstatements comprises specific misstatements identified by
the auditor including the net effect of uncorrected misstatements in prior periods and the
auditor’s best estimate of other misstatements which cannot be specifically identified

72. An auditor’s assessment of materiality level in relation to specific account balances and classes of
transactions will enable the auditor to:
a. omit certain necessary audit tests
b. assess whether the audit opinion will be modified
c. Select audit procedure that are appropriate based on acceptable detection risk
d. Primarily determine whether tests of controls would be performed

73. Analytical procedures are

a. substantive tests designed to evaluate a system of internal control.
b. Tests of control designed to evaluate the validity of management’s representation letter.
c. Substantive tests designed to evaluate the reasonableness of financial information.
d. Tests of controls designed to evaluate the reasonableness of financial information.

74. When the current year’s unaudited trial balance is compared to the prior year’s audited trial balance
a. errors are identified c. irregularities are discovered
b. discrepancies are discovered d. changes are highlighted
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75. Analytical procedures are used for the following purposes, except:
a. To assist the auditor in planning the nature, timing and extent of other audit procedures.
b. As a test performed to obtain audit evidence about the suitability of design and effective
operation of the accounting and internal control systems.
c. As substantive procedures when their use can be more effective or efficient than tests of
details in reducing detection risk for specific financial statement assertions.
d. As an overall review of the financial statements in the final review stage of the audit.

76. The acceptable level of detection risk is inversely related to the

a. Assurance provided by substantive tests.
b. Risk of misapplying auditing procedures.
c. Preliminary judgment about materiality levels.
d. Risk of failing to discover material misstatements.

77. On the basis of 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 c. decrease substantive testing
b. increase materiality levels d. decrease detection risk

78. What is the acceptable level of detection risk if the assessed level of inherent risk is low and control
risk is high?
a. Highest c. Medium
a. Lowest d. Higher

79. A measure of how willing the auditor to accept that the financial statements may be materially
misstated and an unqualified opinion can be issued:
a. acceptable audit risk c. materiality
b. reasonable assurance d. acceptable deviation rate

80. Which of the following is an incorrect statement?

a. Detection risk is a function of the effectiveness of an auditing procedure and its application.
b. Detection risk arises partly from uncertainties that exist when the auditor does not examine 100 percent of
the population.
c. Detection risk arises partly because of other uncertainties that exist even if the auditor were to examine
100 percent of the population.
d. Detection risk exists independently of the audit of the financial statements.

81. This comprises the overall attitude, awareness and actions of directors and management regarding
the internal control system and its importance to the entity
a. control environment c. control procedures
b. accounting system d. risk assessment

82. Which of the following is not an objective of understanding the client’s internal control systems
a. to identify types of potential misstatements that could occur in the financial statements
b. to be able to appropriately decrease the relevant control risk
c. to consider factors that affect the risk of misstatements
d. to design appropriate audit procedures

83. To assess inherent risk, the auditor uses professional judgment to evaluate numerous factors such as
the following, except
a. nature of the entity’s business
b. complexity of underlying transactions which might require using the work of an expert
c. the effectiveness of internal control
d. susceptibility of assets to loss or misappropriation
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84. Which of the following is appropriate about risk assessment?

a. The assessed level of inherent and control risk can be sufficiently low, thus resulting to
eliminating the need for substantive tests.
b. There is an inverse relationship between detection risk and the combined level of inherent and
control risk.
c. Audit risk may be more appropriately determined by assessing inherent and control risk
separately.
d. Detection risk is eliminated if an auditor were to examine 100 percent of the account balance or
class of transactions

85. Which of the following least likely affects the nature, timing, and extent of the procedures performed
by the auditor to obtain an understanding of the accounting and internal control systems of an audit
client?
a. Materiality considerations
b. The level of acceptable detection risk
c. The auditor’s assessment of inherent risk
d. The size and complexity of the entity and of its computer system

86. In evaluating internal control, the first step is to prepare an internal control questionnaire or a
flowchart of the system, the second step should be to
a. determine the extent of audit work necessary to form an opinion.
b. gather enough evidence to determine if the internal control system is functioning as described
c. write a letter to management describing the weaknesses in internal control
d. form a final judgment on the effectiveness of the internal control system.

87. Which of the following is a step in an auditor’s decision to assess control risk at below the
maximum?
a. apply analytical procedures to both financial data and nonfinancial information to detect
conditions that may indicate weak controls
b. perform tests of details of transactions and account balances to identify potential errors and fraud
c. identify specific controls that are likely to detect or prevent material misstatements
d. document that the additional audit effort to perform tests of controls exceeds the potential
reduction in substantive testing

88. When control risk is assessed at the maximum level for all financial statement assertions, an auditor
should document the auditor’s
Understanding of the entity’s Conclusion that control risk Basis for concluding that
internal control structure is control risk is at the
elements at the maximum level maximum
a. yes no no
b. yes yes no
c. no yes yes
d. yes yes yes

89. Regardless of the assessed level of control risk, an auditor would perform some
a. tests of controls to determine the effectiveness of internal control policies
b. analytical procedures to verify the design of internal control procedures
c. substantive tests to restrict detection risk for significant transaction classes
d. dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control
risk

90. The auditor should consider whether the assessment of control risk is confirmed
a. Upon completion of understanding of internal control.
b. Upon the conclusion of the audit, based on the results of substantive procedures and other audit
evidence obtained.
c. Upon completion of tests of controls
d. Before the final audit program is completed.

91. Which of the following questions would an auditor most likely include on an internal control
questionnaire for notes payable?
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a. Are assets that collateralize notes payable critically needed for the entity’s continued existence?
b. Are two or more authorized signatures required on checks that repay notes payable?
c. Are the proceeds from notes payable used for the purchase of noncurrent assets?
d. Are direct borrowings on notes payable authorized by the board of directors?
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92. Which of the following statements is true?

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

93. Which of the following statements is true?

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

94. The likelihood of assessing control risk too low relates to the
a. Effectiveness of the audit
b. Efficiency of the audit
c. Preliminary estimates of materiality levels
d. Allowable risk of tolerable misstatement

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

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

97. Which of the following is an invalid statement about the relationship of accounting and internal
control to the persuasiveness of audit evidence?
a. The effectiveness of the client’s accounting and internal control has a significant
impact on the competence of most types of evidence.
b. Both physical examination and reperformance are likely to be highly reliable if the accounting
internal controls are effective.
a. The effectiveness of accounting and internal control system is inversely related to the
sufficiency of audit evidence required.
b. The effectiveness of accounting policies and procedures on revenue and cash receipts
significantly affects the extent of substantive procedures on cash disbursements and
expenditures.

98. The auditor’s review of the client’s internal control is documented in order to substantiate
a. conformity of the accounting records with GAAP
b. compliance with generally accepted auditing standards
c. adherence to requirements of management
d. the fairness of the financial statement presentation
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