MANILA BUSINESS COLLEGE
AUDITING SPECIALIZED INDUSTRIES
MIDTERM EXAMINATION
2ND TERM 2023-2024
MONTES, RHOWIELYN JOY R.
GENERAL DIRECTIONS:
1. Use No. 2 Mongol pencil only
2. Supply all needed information in the answer sheet provided.
3. Read each question carefully
4. Shade the circle that corresponds to your answer
5. Do not use your mobile phone while the test is going on
6. Sign the attendance sheet before you leave the testing area.
1-9. The audit of Insurance Companies is
governed by the provisions of _____________as
amended in l991, 1992, l997 , 2003 and 2006.
This issued guidelines to perform audit by
external auditors. Other regulations for
compliance are _____________ and relevant
circulars issued by the ______________.
A. Section 85 , Insurance Act 2006, Act 724;
Statement of Accounting Standards 16 (SAS 16)
and National Insurance Commission
B. Federal Insurance Act of 1976, Statement of
Accounting Standards 16 (SAS 16) , National
Insurance Commission
C. Section 85 , Insurance Act 2006, Act 724;
Statement of Accounting Standards 12 (SAS 12)
and National Insurance Commission
D. None of the stated choices has correct answer
10-21. The Insurance Act provides the minimum
paid-up share capital for each class of Insurance
Business. The National Insurance Commission
(NAICOM) has regulated the minimum capital
base for various categories of insurance business.
It proposes ____________ of Life Insurance,
_____________ of Non-Life Insurance,
____________ of Composite business and
______________ for Re-Insurance Business
A. N3 Billion, N6 Billion, N9 Billion and N15 Billion
B. N5 Billion, N9 Billion, N12 Billion and N15
Billion
C. N2 Billion, N3 Billion, N5 Billion and N10 Billion
D. N3 Billion, N5 Billion, N9 Billion and N12 Billion
22-27. The Insurance Act also requires that
where an insurer is carrying out composite
insurance business i.e. ________ and _______
business, a separate records of receipts and
payments must be kept for each of the business
in order to ensure that the revenue and
expenditure of each business be separately
identifiable
A. Life and Composite
B. Life and Non-Life
C. Non-life and Composite
D. All of the above stated choices are correct
28-33. The issue of solvency margin is an
AUDITING SPECIALIZED INDUSTRIES.MIDTERM EXAM. Page 1 of 3
MULTIPLE CHOICE (ENCIRCLE THE LETTER
OF THE BEST ANSWER)
important area of the business of the insurance
business. The Act requires that the margin shall
not be less than ______________ less
________________ during the year under review
or the minimum paid-up capital whichever is
higher
A. 10% of gross premium income less
re-insurance premium paid out
B. 12% of gross premium income less insurance
losses
C. 8% of gross premium less re-insurance
premium paid out
D. 15% of gross premium less re-insurance
premium paid out
34-36. Audit objectives in auditing schools or
educational institutions includes the following ,
EXCEPT
I. To assess management stewardship,
performance, economic resources and obligations
II. To secure the continued maintenance of
soundly based system of controls within each
area of responsibility which in this case is the
schools
III. To ensure continuous examination of
accounting books, store and personnel records
with a view to detecting frauds, errors and
mistakes for corrective actions
IV. To assess adherence to budgetary
provisions/operational guidelines
A. I, II and III are correct
B. II and IV only are correct
C. I, II and IV are correct
D. All of the above statements are correct
37-39. These are factors which militates the
effective and efficiency in auditing schools
financial statements
Most accountants take advantage of the trust and
confidence reposed on them by school owners
and principals to make fraudulent
mis-presentation which the school owner or
principal relies on and suffers serious financial
damage
A. Loopholes in the legal system
B. Nature of School Administrators
C. Poor remuneration
D. Confidence Scheme
40-42. This leads to poor performance and that
breeds malpractice. Failure to undergo on-the-job
training, relevant outside source or even attend
seminar of that nature, will lead to unsatisfactory
performance which eventually creates more room
for malpractice by the outgoing accountants and
auditors
A. Loopholes in the legal system
B. Inadequate training and re-training of
accountants
C. Poor remuneration
D. Confidence Scheme
43-45. When accountants are not well paid to
measure up with the constraints of the economy
accountants will be compelled to steal, this is so
because physical cash is involved
A. Loopholes in the legal system
B. Inadequate training and re-training of
accountants
C. Poor remuneration
D. Confidence Scheme
46-48. There are a number of risks associated
with banking activities that, while not unique to
banking, are important in that they serve to
shape banking operations. The auditor obtains an
understanding of the nature of these risks and
how the bank manages them.
The risk of foreign customers and counterparties
failing to settle their obligations because of
economic, political and social factors of the
counterparty’s home country and external to the
customer or counterparty.
A. Credit risk
B. Country risk
C. Fiduciary risk
D. Modeling risk
49-51. The risk of loss arising from the changes
in the bank’s ability to sell or dispose of an asset
A. Credit risk
B. Country risk
C. Fiduciary risk
D. Liquidity risk
52-57. The auditor is required to assess the levels of
__________ and _________ risks associated with
different aspects of a bank’s operations and to
determine the nature, timing and extent of the audit
procedures.
A. Audit risk, Detection risk
C. Control risk, Detection risk
C. Inherent risk, Control risk
D. Inherent risk, Detection risk
58-60. The risk of loss arising from future
movements in the exchange rates applicable to
foreign currency assets, liabilities, rights and
obligations.
A. Credit risk
B. Country risk
C. Currency risk
D. Liquidity risk
AUDIITNG SPECIALIZED INDUSTRIES. MIDTERM EXAM. Page 2 of 3
61-63. The risk that contracts are documented
incorrectly or are not legally enforceable in the
relevant jurisdiction in which the contracts are to
be enforced or where the counterparties operate.
This can include the risk that assets will turn out
to be worth lesser, liabilities will turn out to be
greater than expected because of inadequate or
incorrect legal advice or documentation.
A. Credit risk
B. Legal and documentary risk
C. Currency risk
D. Liquidity risk
64-66. The risk of loss arising from adverse
changes in market prices, including interest
rates, foreign exchange rates, equity and
commodity prices and from movements in the
market prices of investments.
A. Price risk
B. Legal and documentary risk
C. Currency risk
D. Liquidity risk
67-69. The risk of losing business because of negative
public opinion and consequential damage to the bank’s
reputation arising from failure to properly manage some
of the above risks, or from involvement in improper or
illegal activities by the bank or its senior management,
such as money laundering or attempts to cover up
losses.
A. Currency risk
B. Legal and documentary risk
C. Reputational risk
D. Liquidity risk
70-72. The risk of loss arising from failure to comply
with regulatory or legal requirements in the relevant
jurisdiction in which the bank operates. It also includes
any loss that could arise from changes in regulatory
requirements
A. Currency risk
B. Regulatory risk
C. Reputational risk
D. Liquidity risk
73-75. The risk of loss arising from the possibility of
the bank not having sufficient funds to meet its
obligations, or from the bank’s inability to access capital
markets to raise required funds.
A. Currency risk
B. Regulatory risk
C. Solvency risk
D. Liquidity risk
II. TRUE OR FALSE : Indicate T if the
Statement is TRUE and F if the statement is
FALSE
False 76-78. The auditor considers Operational
risk and obtains an understanding of how the
management and those charged with governance
monitor that the system of internal control
(including internal audit) operates effectively.
PSA 402, “Audit Considerations Relating to False 106-108. . The risk of loss arising from
Entities Using Service Organizations” gives the possibility of the bank not having sufficient
further guidance on this subject. funds to meet its obligations, or from the bank’s
inability to access capital markets to raise
False 79-81. Corporate governance plays a required funds is financial risk
particularly important role in banks; the BSP sets True 109-111. The audit of any educational
out requirements for banks to have effective institution is complex in nature; the auditor
corporate governance structure should consider the enabling legislation, the
nature of its activities, the funding, the system of
False 82-84. Obtaining a knowledge of the internal control, the accounting format and the
bank’s business requires the auditor to reporting requirement
understand True 112-114. An effective risk management
I. The bank’s corporate governance structure system in a bank generally requires oversight
II. The credit standing and regulatory and involvement in the control process by those
environment in which the bank operates; charged with governance
III. The market conditions existing in each of the False 115-117. Customer risk is define as the
significant sectors in which the bank operates risk of foreign customers and counterparties
All the stated statements are true. failing to settle their obligations because of
economic, political and social factors of the
False 85-87. Banking risks increase with the counterparty’s home country and external to the
degree of concentration of a bank’s exposure to any customer or counterparty
one customer, failure in marketing product or True 118-120. Banks have custody of large
services, industry, geographic area or country amounts of monetary items, including cash and
True 88-90. Obtaining a knowledge of the bank’s negotiable instruments, whose physical security
business requires the auditor to understand the has to be safeguarded during transfer and while
economic and regulatory environment prevailing for being stored. The liquidity characteristics of these
the principal countries in which the bank operates items make banks vulnerable to misappropriation
and fraud
True 91-93. PSA 210, “Terms of Audit PREPARED BY :
Engagements” . The auditor considers his own
skills and competence and those of his assistants
to conduct the engagement and the need for Bernadette K. Dimzon, MBA-CPA
sufficient expertise in the aspects of banking Faculty, In-Charge
relevant to the audit of the bank’s business
activities.
False 94-96. The audit assertion of the bank
auditor should include obtaining a sufficient
knowledge of the entity’s business and
governance structure, and a sufficient
understanding of the accounting and internal
control systems, including risk management and
internal audit functions
True 97-99. In addition to the general factors
set out in PSA 210, the auditor considers
including comments on the following when
issuing an engagement letter. The use and source
of specialized accounting principles, with
particular reference to : Pronouncements of the
BSP and other regulatory authorities (e.g., the
Philippine Deposit Insurance Commission)
True 100-102. Corporate governance plays a
particularly important role in banks; PDIC sets
out requirements for banks to have effective
corporate governance structures. Accordingly, the
auditor obtains an understanding of the bank’s
corporate governance structure and how those
charged with governance discharge their
responsibilities for the supervision, control and
direction of the bank
True 103-105. Banks are regulated by the BSP,
whose regulatory requirements often influence
the BSP Charter that banks follow.
Non-compliance with regulatory requirements, for
example, capital adequacy requirements, could
have implications for the bank’s financial
statements or the disclosures therein

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