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TEST BANK 1
AUDITING THEORY
82102017
1. Under the PRC BOA Resolution No. 2-2016, which of the following shall be submitted by the
individual CPA, firms, and partnerships of CPAs engaged in the practice of public
accountancy to the Professional Regulation Commission thru the Standards and Inspection
Division?
A. Engagement Reports.
B. Engagement Budgets.
C. Engagement Letters.
D. Engagement Contracts.

2. The following information shall be included in the Engagement Report (ER), except
A. Type of engagement
B. Engagement fee
C. Start date and completion date of engagement.
D. Audit opinion rendered, if the type of engagement rendered is Compilation of Financial
Statements.

3. Which of the following shall be prepared and signed by the CPA who is tasked to assist
management in the preparation and presentation of financial information of an entity in
accordance with an applicable financial reporting framework?
A. Auditors Report.
B. Practitioners Review Report.
C. Certificate on the Compilation Services for Preparation of Financial Statements
D. Review Report

4. BOA Resolution No. 263 Series of 2015 approves the adoption of _________________
(subject to changes of certain provisions) as the Code of Ethics for Professional Accountants
in the Philippines.
A. IFAC 2010 Code of Ethics for Professional Accountants
B. IFAC 2012 Code of Ethics for Professional Accountants
C. IFAC 2013 Code of Ethics for Professional Accountants
D. IFAC 2015 Code of Ethics for Professional Accountants

5. When an audit client becomes a Public Interest Entity (PIE), the length of time the individual
has served the audit client as a key audit partner before the client becomes a PIE shall be
taken into account in determining the timing of the rotation. If the individual has served
the audit client as a key audit partner for five (5) years or less when the client becomes a
PIE, the number of years the individual may continue to serve the client in that capacity
before rotating off the engagement is
A. Seven (7) years
B. Seven (7) years less the number of years served
C. Maximum of two (2) additional years
D. Five (5) years

6. If the individual has served the audit client as a key audit partner for six (6) or more years
when the client becomes a PIE, the partner may continue to service in that capacity for
________________ before rotating off the engagement.
A. Seven (7) years
B. Seven (7) years less the number of years served
C. Maximum of two (2) additional years
D. Five (5) years

7. Professional Accountant refers to an individual who holds a valid Certificate of Registration

and current Professional Identification Card issued by the Board of Accountancy (i.e., CPA)
and the Professional Regulation Commission (PRC) if he/she is in
A. Public practice or education only.
B. Public practice or industry or commerce only.
C. Public practice or public sector only.
D. Public practice, industry or commerce, public sector, or education.
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8. PSA 700 (Revised) states that the first section of the auditors report shall have the heading
A. Opinion
B. Basis for Opinion
C. Responsibilities for the Financial Statements
D. Auditors Responsibilities for the Audit of the Financial Statements

9. PSA 700 (Revised) states that the Opinion section of the auditors report shall also identify
the entity whose financial statements have been audited and
A. State that the financial statements have been audited and identify the title of each
statement comprising the financial statements.
B. Specify the date of, or period covered by, each financial statement comprising the
financial statements.
C. Refer to the notes, including summary of significant accounting policies.
D. All of the above

10. PSA 700 (Revised) states that for audits of complete sets of general purpose financial
statements of listed entities, the auditor shall communicate ______________ in the
auditors report.
A. Significant deficiencies in the entitys internal control system.
B. Matters of interest to those charged with governance.
C. Other non-assurance services performed
D. Key audit matters

11. One common type of CAAT is the use of audit software to process data of audit significance
from the entitys 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 perform his/her
tests independent of the entitys computer processing personnel; and it can be used to audit
the data in most file formats and structures is called a
A. Customized program
B. Purpose-written program
C. Utility program
D. Package or generalized audit software (GAS)

12. Which of the following factors is most relevant when an auditor considers the client's
organizational structure in the context of control risk?
A. Management's attitude toward information processing and accounting departments.
B. The organization's recruiting and hiring practices.
C. Physical proximity of the accounting function to upper management.
D. The suitability of the client's lines of reporting.

13. An auditor who uses the work of an expert may refer to the expert in the auditor's report if
the:
A. Auditor believes that the expert's findings are reasonable in the circumstances.
B. Expert's findings support the related assertions in the financial statements.
C. Auditor modifies the report because of the difference between the client's and the
expert's valuations of an asset.
D. Expert's findings provide the auditor with greater assurance of reliability about
management's representations.

14. In attribute sampling, a 25% change in which of the following factors will have the smallest
effect on the size of the sample?
A. Tolerable rate of deviation.
B. Number of items in the population.
C. Degree of assurance desired.
D. Planned assessed level of control risk.
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15. Which of the following is an analytical procedure that an auditor most likely would perform
during the final review stage of an audit?
A. Comparing each individual expense account balance with the relevant budgeted
amounts and investigating any significant variations.
B. Testing the effectiveness of internal control procedures that appear to be suitably
designed to prevent or detect material misstatements.
C. Reading the financial statements and considering whether there are any unusual or
unexpected balances that were not previously identified.
D. Calculating each individual expense account balance as a percentage of total entity
expenses and comparing the results with industry averages.

16. A CPA firm is completing the fieldwork for an audit of Sweden Co. for the current year ended
December 31. The manager in charge of the audit is performing the final steps in the
evidence accumulation phase of the audit and notes that there have been several changes
in Sweden during the year under audit. Which of the following items would indicate there
could be substantial doubt about Sweden's ability to continue as a going concern for a
reasonable period of time?
A. Cash infusion by a venture capital firm.
B. Recurring working capital shortages.
C. A lack of significant contracts with new customers.
D. Term debt refinanced with a new bank.

17. An accountant agrees to the client's request to change an engagement from a review to a
compilation of financial statements. The compilation report should include:
A. No reference to the original engagement.
B. Reference to a departure from PSAs.
C. Scope limitations that may have resulted in the change of engagement.
D. Information about review procedures already performed.

18. A practitioner should accept an assurance engagement only if

A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended users.
C. The practitioners conclusion is to be contained in a written report.
D. The subject matter is the responsibility of either the intended users or the practitioner.

19. Which of the following fraudulent activities most likely could be perpetrated due to the lack
of effective internal controls in the revenue cycle?
A. Fictitious transactions may be recorded that cause an understatement of revenues and
overstatement of receivables.
B. Claims received from customers for goods returned may be intentionally recorded in
other customers accounts.
C. Authorization of credit memos by personnel who receive cash may permit the
misappropriation of cash.
D. The failure to prepare shipping documents may cause an overstatement of inventory
balances.

20. 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 of a limited
assurance engagement?
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 practitioners 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 form of expression of the
practitioners 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
practitioners 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
practitioners conclusion.
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21. 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. Acceptance and continuance of clients.
B. Human resources.
C. Ethical requirements.
D. Leadership responsibilities for quality within the firm.

22. If the auditor believes that the financial statements are not fairly stated or is unable to reach
a conclusion because of insufficient evidence, the auditor
A. Should withdraw from the engagement.
B. Should request an increase in audit fees so that more resources can be used to conduct
the audit.
C. Has the responsibility of notifying financial statement users through the auditors report.
D. Should notify regulators of the circumstances.

23. Which of the following statements best describes the auditors responsibility regarding the
detection of fraud?
A. The auditor is responsible for the failure to detect fraud only when such failure clearly
results from non-performance of audit procedures specifically described in the
engagement letter.
B. The auditor is required to provide reasonable assurance that the financial statements
are free of both material errors and fraud.
C. The auditor may extend auditing procedures to actively search for evidence of fraud
where examination indicates that fraud may exist.
D. The auditor is responsible for the failure to detect fraud only when an unmodified opinion
is issued.

24. For audit evidence to be compelling to the auditor it must be sufficient and appropriate.
Which statement below is not correct regarding the appropriateness of audit evidence?
A. The more effective the internal control system, the more assurance it provides the
auditor about the reliability of financial reporting by the client.
B. An auditors opinion to be economically useful and profitable to the auditing firm needs
to be formed within a reasonable time and based on evidence obtained that assures
profits for the auditing firm.
C. Evidence obtained from independent sources outside the entity is generally more reliable
than evidence secured solely within the entity.
D. The independent auditors direct personal knowledge, obtained through inquiry,
observation and inspection, is generally more persuasive than information obtained
indirectly.

25. Which of the following is not a correct use of the terminology in relation to audit evidence?
A. Evidence obtained from an independent source outside the client organization is more
reliable than that obtained from within.
B. Documentary evidence is more reliable when it is received by the auditor indirectly rather
than directly.
C. Documents that originate outside the company are considered more reliable than those
that originate within the clients organization.
D. External evidence, such as communications form banks, is generally regarded as more
reliable than answers obtained from inquiries of the client.

26. The audit team gathers information about a new clients business and industry in order to
obtain
A. An understanding of the clients internal control system for financial reporting.
B. An understanding of how economic events and transactions have an effect on the
companys financial statements.
C. Information about engagement risk.
D. Information regarding whether the company is engaging in financial statement fraud.
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27. When performing planning analytical procedures for a client, the auditor detected that the
gross profit percentage had declined by 50% from the previous year to the year currently
under audit. The auditor should
A. Investigate the possibility the client may have made an error in their cost of goods sold
computation.
B. Assist management in developing greater cost efficiencies in their product line.
C. Prepare a going concern opinion for the client.
D. Advise the client to have extensive disclosure to alleviate investor concerns.

28. The auditors primary purpose in auditing the clients system of internal control over financial
reporting is
A. To prevent fraudulent financial statements from being issued to the public.
B. To evaluate the effectiveness of the companys internal controls over all relevant
assertions in the financial statements.
C. To report to management that the internal controls are effective in preventing
misstatements from appearing on the financial statements.
D. To efficiently conduct the audit of financial statements.

29. A company is concerned with the theft of cash after the sale has been recorded. One way
in which fraudsters conceal the theft is by a process called lapping. Which of the following
best describes lapping?
A. Reduce the customers account by recording a sales return.
B. Write off the customers account.
C. Reduce the customers account by recording a sales allowance.
D. Apply the payment from another customer to the customers account.

30. 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.

31. Which of the following statements is not true?

A. Analytical procedures emphasize the overall reasonableness of transactions and
balances.
B. Tests of controls are concerned with evaluating whether controls are sufficiently
effective to justify reducing control risk and thereby reducing analytical procedures.
C. Substantive tests of transactions emphasize the verification of transactions recorded in
the journals and then posted in the general ledger.
D. Tests of details of balances emphasize the ending balances in the general ledger.

32. Accepting an engagement to examine an entitys financial projection most likely would be
appropriate if the projection were to be distributed to
A. All employees who work for the entity.
B. Potential stockholders who request a prospectus or a registration statement.
C. A bank with which the entity is negotiating for a loan.
D. All stockholders of record as of the report date.

33. In many audits of sales transactions, substantive tests of transactions can be reduced in
determining the completeness objective because
A. Understatements of assets and income are a greater concern than overstatements.
B. Overstatements of assets and income are a greater concern than understatements.
C. It doesnt matter if income is understated because the savings on income tax offsets the
reduced revenue and net income is correct.
D. The unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of
the two financial statements will not be misleading.
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34. To determine if a sample is truly representative of the population, an auditor would be

required to
A. Conduct multiple samples of the same population.
B. Never use sampling because of the expense involved.
C. Audit the entire population.
D. Use systematic sample selection.

35. The most important test of details of balances to determine the existence of recorded
accounts receivable is
A. Tracing details of sales invoices to shipping documents.
B. Tracing the credits in accounts receivable to bank deposits.
C. Tracing sales returns entries to credit memos issued and receiving room reports.
D. The confirmation of customers balances.

36. Which of the following is the most effective control procedure to detect vouchers that were
prepared for the payment of goods that were not received?
A. Count goods upon receipt in storeroom.
B. Match purchase order, receiving report, and vendors invoice for each voucher in
accounts payable department.
C. Compare goods received with goods requisitioned in receiving department.
D. Verify vouchers for accuracy and approval in internal audit department.

37. If the client fails to record disposals of property, plant, and equipment, both the original
cost of the asset account and the net book value will be incorrect. What will the effect be
of this misstatement on the original cost and the book value?
A. Both will be overstated indefinitely.
B. The original cost will overstated indefinitely, and the net book value will be overstated
until the asset is fully depreciated.
C. The original cost will be overstated indefinitely, and the net book value will be
understated indefinitely.
D. The original cost will be overstated indefinitely, and the net book value will be
understated until the asset is fully depreciated.

38. You are gathering evidence for the audit objective that existing inventory items are included
in the inventory listing schedule. The audit procedure that would provide you with the best
evidence to confirm this objective is
A. Trace from inventory tags to the inventory listing schedule and make sure the inventory
tag is included.
B. Trace the inventory totals to the general ledger.
C. Perform tests of lower-cost-or-net realizable value.
D. Account for unused tags shown in the auditors documentation to make sure no tags
have been added.

39. Which of the following is not an objective of the auditors examination of notes payable?
A. To determine whether internal controls are adequate.
B. To determine whether clients financing arrangements are effective and efficient.
C. To determine whether transactions regarding the principal and interest of notes are
properly authorized.
D. To determine whether the liability for notes and related interest expense and accrued
liabilities are properly stated.

40. Which of the following errors would be least likely to be discovered during the tests of the
bank reconciliation?
A. Payment was made to an employee for more hours than he worked.
B. Cash received by the client subsequent to the balance sheet date was recorded as cash
receipts in the current year.
C. Payments on notes payable debited directly to the bank balance by the bank were not
entered in the clients records.
D. Deposits were recorded in the cash receipts records near the end of the year, deposited
in the bank, and were included in the bank reconciliation as a deposit in transit.
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41. Assurance provided by a review is substantially less than an audit. Which of the following
statements is true regarding these services?
A. A review requires more substantive evidence than an audit.
B. An audit requires less evidence related to internal control than a review.
C. A review requires less evidence than an audit.
D. None of the above statements is true.

42. When expressing an unmodified opinion, the auditor who evaluates the audit findings should
be satisfied that the
A. Amount of known misstatement is documented in the management representation
letter.
B. Estimate of the total likely misstatement is less than a material amount.
C. Amount of known misstatement is acknowledged and recorded by the client.
D. Estimate of the total likely misstatement includes the adjusting entries already recorded
by the client.

43. Reyes Merchandising Co. maintains a staff of three full-time internal auditors. If the work
of the internal auditors is relevant to the audit, it is efficient to consider how that work may
affect the audit, and the internal auditors are found to be competent and objective, the
independent auditor most likely will
A. Nevertheless need to make direct tests of assertions about material financial statement
amounts for which the risk of material misstatement is high.
B. Decrease the extent of the tests of controls needed to restrict detection risk to the
acceptable level.
C. Increase the extent of the procedures needed to reduce control risk to an acceptable
level.
D. Not evaluate and test the work performed by the internal auditors.

44. A client who recently installed a new accounts payable system assigned employees a user
identification code (UIC) and a separate password. Each UIC is a persons name, and the
individuals password is the same as the UIC. Users are not required to change their
passwords at initial log-in nor do passwords ever expire. Which of the following statements
does not reflect a limitation of the clients computer-access control?
A. Employees can easily guess fellow employees passwords.
B. Employees are not required to change passwords.
C. Employees can circumvent procedures to separate duties.
D. Employees are not required to take regular vacations.

45. On January 2, 2017, the TANYA CO. received a notice from its primary suppliers that
effective immediately all wholesale prices would be increased 10%. On the basis of the
notice, TANYA revalued its December 31, 2016, inventory to reflect the 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 current assets but not to total assets
or net income. In reporting on the companys financial statements for the year ended
December 31, 2016, in which inventory is valued at the adjusted amount, the auditor would
most likely
A. Express an unmodified opinion provided the nature of the adjustment and the amounts
involved are disclosed in notes to the financial statements.
B. Express a qualified opinion.
C. Disclaim an opinion.
D. Express an adverse opinion.
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46. An auditors report on financial statements prepared in accordance with the financial
reporting provisions of a contract (that is, a special purpose framework) to comply with the
provisions of that contract should include all of the following except
A. An opinion as to whether the financial statements are presented fairly, in all material
respects, in accordance with the financial reporting provisions of the contract.
B. A statement that indicates the basis of accounting used.
C. An opinion as to whether the basis of accounting used is appropriate under the
circumstances.
D. Reference to the note to the financial statements that describes the basis of
presentation.

47. An auditors report on financial statements prepared in accordance with the financial
reporting provisions of a contract (that is, a special purpose framework) to comply with the
provisions of that contract should include all of the following, except
A. An opinion as to whether the financial statements are presented fairly, in all material
respects, in accordance with the financial reporting provisions of the contract.
B. A statement that indicates the basis of accounting used.
C. An opinion as to whether the basis of accounting used is appropriate under the
circumstances.
D. Reference to the note to the financial statements that describes the basis of
presentation.

48. When an auditor reports on financial statements prepared on an entitys income tax basis,
the auditors report should
A. State the basis of presentation of the financial statements.
B. Disclaim an opinion on whether the statements were examined in accordance with
Philippine Standards on Auditing (PSAs).
C. Not express an opinion on whether the statements are presented in accordance with
the tax basis of accounting used.
D. Include an explanation of how the results of operations differ from the cash receipts and
disbursements basis of accounting.

49. When an auditor is requested to express an opinion on the rental and royalty income of an
entity, the auditor may
A. Accept the engagement provided the auditor will comply with relevant ethical
requirements, including those pertaining to independence, relating to financial
statement audit engagements and all PSAs relevant to the audit.
B. Accept the engagement provided distribution of the auditors report is limited to the
entitys management.
C. Not accept the engagement unless also engaged to audit the full financial statements
of the entity.
D. Not accept the engagement because to do so would be tantamount to agreeing to
express a piecemeal opinion.

50. An auditor has identified the controllers review of the bank reconciliation as a control to
test. In connection with this test, the auditor interviews the controller to understand the
specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank
reconciliation is properly prepared by the accountant and reviewed by the controller as
evidenced by their respective sign-offs. Which of the following types of audit procedures do
these actions illustrate?
A. Observation and inspection of records.
B. Confirmation and reperformance.
C. Inquiry and inspection of records.
D. Analytical procedures and reperformance.
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51. An auditor established a P180,000 tolerable misstatement for an asset with an account
balance of P3,000,000. The auditor selected a sample of every 20th item from the population
that represented the asset account balance and discovered a net overstatement of P10,500
(P11,100 overstatements minus P600 understatements). Under these circumstances, the
auditor most likely would conclude that
A. The asset account is fairly stated because the tolerable misstatement exceeds the net
of projected actual overstatements and understatements.
B. The asset account is fairly stated because the total projected misstatement is less than
the tolerable misstatement.
C. There is an unacceptably high risk that the actual misstatements in the population
exceed the tolerable misstatement because the total projected misstatement exceeds
the tolerable misstatement.
D. There is an unacceptably high risk that the tolerable misstatement is more than the sum
of actual overstatements and understatements.

52. In an audit of special purpose financial statements, the auditor shall obtain an understanding
of
I. The purpose for which the financial statements are prepared.
II. The intended users.
III. The steps taken by management to determine that the applicable financial reporting
framework is acceptable in the circumstances.
A. I and III only C. I, II, and III
B. II and III only D. I and II only

53. An auditor may express an opinion on an entitys accounts receivable balance even if the
auditor has disclaimed an opinion on the financial statements taken as a whole provided
the
A. Report on the accounts receivable is presented separately from the disclaimer of opinion
on the financial statements.
B. Auditor also reports on the current asset portion of the entitys balance sheet.
C. Use of the report on the accounts receivable is restricted.
D. Report on the accounts receivable discloses the reason for the disclaimer of opinion on
the financial statements.

54. An auditor may accept an engagement to report on summary financial statements in

accordance with PSA 810 only when
A. The auditor has been engaged to conduct an audit in accordance with PSAs of the
financial statements from which the summary financial statements are derived.
B. Summary financial statements are distributed only to management and the board of
directors.
C. Auditor describes the additional review procedures performed on the summary financial
statements.
D. Summary financial statements are presented in comparative form with the prior years
summary financial statements.

55. A successor auditor's inquiries of the predecessor auditor should include questions
regarding:
A. The predecessor's evaluation of audit risk and judgment about materiality.
B. Subsequent events that occurred since the predecessor's audit report was issued.
C. The predecessor's understanding as to the reasons for the change in auditors.
D. The predecessor's knowledge of accounting matters of continuing significance.

56. Which of the following most likely would cause an auditor to consider whether a client's
financial statements contain material misstatements?
A. Management did not disclose to the auditor that it consulted with other accountants
about significant accounting matters.
B. The chief financial officer will not sign the management representation letter until the
last day of the auditor's field work.
C. Audit trails of computer-generated transactions exist only for a short time.
D. The results of an analytical procedure disclose unexpected differences.
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57. Which of the following actions should the auditor take in response to discovering a deviation
from the prescribed control procedure?
A. Make inquiries to understand the potential consequence of the deviation.
B. Assume that the deviation is an isolated occurrence without audit significance.
C. Report the matter to the next higher level of authority within the entity.
D. Increase sample size of tests of controls.

58. The auditor should perform tests of controls when

A. Substantive procedures alone do not provide sufficient appropriate audit evidence at the
relevant assertion level.
B. Tests of details and substantive analytical procedures provide sufficient appropriate
audit evidence to support the assertion being evaluated.
C. The auditor is not able to obtain an understanding of internal controls.
D. The owner-manager performs virtually all the functions of internal control.

59. An auditor who has confirmed accounts receivable may discover that the sales journal was
held open past year end if
A. Positive confirmations sent o debtors are not returned.
B. Negative confirmations sent to debtors are not returned.
C. Most of the returned negative confirmations indicate that the debtor owes a larger
balance than the amount being confirmed.
D. Most of the returned positive confirmations indicate that the debtor owes a smaller
balance than the amount being confirmed.

60. Which of the following procedures would best detect a liability omission by management?
A. Inquiry of senior support staff and recently departed employees.
B. Review and check mathematical accuracy of financial statements.
C. Review articles of incorporation and corporate bylaws.
D. Review purchase contracts and other legal documents.

61. The risk of material misstatement refers to

A. Control risk and acceptable audit risk.
B. Inherent risk.
C. The combination of inherent risk and control risk.
D. Inherent risk and audit risk.

62. In a financial statement audit, inherent risk is evaluated to help an auditor assess which of
the following?
A. The internal audit departments objectivity in reporting a material misstatement of a
financial statement assertion it detects to the audit committee.
B. The risk the internal control system will not detect a material misstatement of a financial
statement assertion.
C. The risk that the audit procedures implemented will not detect a material misstatement
of a financial statement assertion.
D. The susceptibility of a financial statement assertion to a material misstatement assuming
there are no related controls.

63. Related party transactions may be indicated when another company

A. Subsidizes certain operating expenses of the company.
B. Purchases its securities at their fair value.
C. Loans to company at market rates.
D. Has had a distributor relationship with the company for 10 years.

64. An auditor should examine minutes of the board of directors meetings

A. Through the date of the financial statements.
B. Through the date of the audit report.
C. Only at the beginning of the audit.
D. On a test basis.
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65. If the auditor were responsible for making certain that all of managements assertions in
the financial statements were absolutely correct
A. Bankruptcies could no longer occur.
B. Bankruptcies would be reduced to a very small number.
C. Audits would be much easier to complete.
D. Audits would not be economically practical.

66. Which of the following statements is true?

A. Auditors have generally found that the most effective and efficient way to conduct an
audit is to obtain some assurance for each class of transaction and for the ending
balance of the related account.
B. Managements assertion follow and are closely related to the audit objectives.
C. The auditors primary responsibility is to find and disclose fraudulent management
assertions.
D. Assertions about presentation and disclosure deal with whether the accounts have been
included in the financial statements at appropriate amounts.

67. Which of the following statements about the existence and completeness assertions is not
true?
A. The existence and completeness assertions emphasize different audit concerns.
B. Existence deals with overstatements and completeness deals with understatements.
C. Existence deals with understatements and completeness deals with overstatements.
D. The completeness assertion deals with unrecorded transactions.

68. In testing for cutoff, the objective is to determine

A. Whether all of the current periods transactions are recorded.
B. Whether transactions are recorded in the correct accounting period.
C. The proper cutoff between capitalizing and expensing expenditures.
D. The proper cutoff between disclosing items in notes to the financial statements or in
account balances.

69. Determine which of the following is most correct regarding the reliability of audit evidence?
A. Information that is indirectly obtained from external sources is the most reliable audit
evidence.
B. Reliability of audit evidence is dependent upon the evidence being convincing.
C. Reliability of evidence refers to the amount of evidence obtained.
D. An effective internal control system provides more reliable audit evidence.

70. 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. Inappropriate segregation of duties or independent checks on performance.
D. Adverse relationships between management and employees.

71. A control that relates to all parts of the IT system is called a/an
A. General control.
B. Systems control.
C. Universal control.
D. Applications control.

72. The auditor would design which of the following audit tests to detect possible monetary
errors in the financial statements?
A. Control tests.
B. Analytical procedures.
C. Risk assessment procedures.
D. Tests of operating effectiveness of controls over revenue and cash.
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73. A document that details what the auditor will do to gather sufficient, appropriate evidence
is the
A. Audit strategy.
B. Audit program.
C. Audit procedure.
D. Audit risk model.

74. An auditor noted that the accounts receivable department is separate from other accounting
activities. Credit is approved by a separate credit department. Control accounts and
subsidiary ledgers are balanced monthly. Similarly, accounts are aged monthly. The
accounts receivable manager writes off delinquent accounts after 1 year, or sooner if a
bankruptcy or other unusual circumstances are involved. Credit memoranda are
prenumbered and must correlate with receiving reports. Which of the following areas could
be viewed as an internal control weakness of the above organization?
A. Write-offs of delinquent accounts.
B. Credit approvals.
C. Monthly aging of receivables.
D. Handling of credit memos.

75. A purchasing agent places an order for inventory whenever a requisition is received from
the warehouse. The warehouse clerk issues requisitions based on periodic physical counts
because no perpetual records are maintained. Numerous duplicate orders have been placed
for goods previously ordered but not received. To prevent this excess ordering, the firm
should
A. Keep an adequate record of open purchase orders and review it before ordering.
B. Count goods in the warehouse less often.
C. Use prenumbered purchase orders.
D. Not use purchase requisitions.

76. Which of the following is not a category of assertions that management makes about the
accounting information in the financial statements?
A. Assertions about classes of transactions for the period under audit.
B. Assertions about account balances at period end.
C. Assertions about the quality of source documents used to prepare the financial
statements.
D. Assertions about presentation and disclosure.

77. The refusal of a clients lawyer to provide a representation on the legality of a particular act
committed by the client is ordinarily
A. Sufficient reason to issue a subject to opinion.
B. Considered to be a scope limitation.
C. Insufficient reason to modify the auditors report because of the lawyers obligation of
confidentiality.
D. Proper grounds to withdraw from the engagement.

78. As a condition of obtaining a loan from Metro Manila Bank, Maasim Corp. is required to submit
an audited statement of financial position but not the related statements of income, changes in
equity, or cash flows. Maasim would like to engage a CPA to audit only its statement of financial
position. Under these circumstances, the CPA
A. May not audit only Maasims statement of financial position if the amount of the loan is
material to the financial statements taken as a whole.
B. May not audit only Maasims statement of financial position if Maasim is not a listed entity.
C. May audit only Maasims statement of financial position if the CPA disclaims an opinion on
the other financial statements.
D. May audit only Maasims statement of financial position if access to the information
underlying the basic financial statements is not limited.

79. In evaluating the reasonableness of an entitys accounting estimates, an auditor normally would
be concerned about assumptions that are
A. Susceptible to bias. C. Insensitive to variations.
B. Consistent with prior periods. D. Similar to industry guidelines.
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80. When CPA firms do an audit of historical financial statements, part of the audit usually
consists of identifying operational problems and making recommendations that may benefit
the audit client. The recommendations can be made orally but they are typically made by
use of a
A. Letter of representations. C. Management letter.
B. Engagement letter. D. Client letter.

81. 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. Business failure. C. Audit risk.
B. Audit failure. D. All of the above.

82. Which of the following statements is false?

A. 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.
B. 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.
C. The firms quality control policies and procedures need not be documented and
communicated to the firms personnel.
D. 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.

83. 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 a clear manner in the presentation of the subject matter
information.
C. Through inclusion in the firms office policy manual.
D. Through inclusion in a clear manner in the assurance report.

84. An auditor concludes that the omission of a substantive procedure considered necessary at
the time of the examination may impair the auditors present ability to support the previously
expressed opinion. The auditor need not apply the omitted procedure if
A. The risk of adverse publicity litigation is low.
B. The results of other procedures that were applied tend to compensate for the procedure
omitted.
C. The auditors opinion was qualified because of a departure from financial reporting
standards.
D. The results of the subsequent periods tests of controls make the omitted procedure less
important.

85. The auditors risk assessment procedures should always include the following, except
A. Inquiries of management and of others within the entity.
B. Analytical procedures.
C. Observation and inspection.
D. Substantive test procedures and tests of controls.

86. The auditor should obtain an understanding of the entitys objectives and strategies, and
those business risks that may result in risks of material misstatement. Which of the
following statements concerning the entitys business risk is incorrect?
A. Business risk is broader than the risk of material misstatement of the financial
statements, though it includes the latter.
B. An understanding of the business risks facing the entity increases the likelihood of
identifying risks of material misstatement.
C. The auditor has a responsibility to identify or assess all business risks.
D. Business risk may arise from the development of new products or services that may fail.
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87. Which of the following statements concerning audit risk and its components is incorrect?
A. 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.
B. The higher the assessment of inherent and control risks, the more evidence the auditor
should obtain from the performance of substantive procedures.
C. The assessed level of inherent risk need not 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.

88. 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 controls and determine whether they have been
implemented by performing tests of controls.

89. Which of the following statements related to application controls is correct?

A. Application controls relate to various aspects of the IT function including software
acquisition and the processing of transactions.
B. Application controls relate to various aspects of the IT function including physical
security and the processing of transactions in various cycles.
C. Application controls relate to all aspects of the IT function.
D. Application controls relate to the processing of individual transactions.

90. An entitys management is responsible for the preparation and fair presentation of the
financial statements. Its responsibility includes the following, except
A. Designing, implementing, and maintaining internal control relevant to the preparation
and presentation of financial statements.
B. Making accounting estimates that are reasonable in the circumstances.
C. Selecting and applying appropriate accounting policies.
D. Assessing the risks of material misstatement of the financial statements.

91. The following statements relate to the use of analytical procedures as substantive
procedures. Which is false?
A. Substantive analytical procedures are applicable when there is only a small volume of
transactions.
B. The application of substantive analytical procedures 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
entitys information system.
D. Reliance on the results of substantive analytical procedures will depend on the auditors
assessment of the risk that the analytical procedures may identify relationships as
expected when, in fact, a material misstatement exists.

92. The confirmation of customers accounts receivable rarely provides reliable evidence about
the valuation assertion because
A. Customers may not be inclined to report understatement errors in their accounts.
B. Auditors typically select many accounts with low recorded balances to be confirmed.
C. It is not practicable to ask the customer to confirm detailed information relating to its
ability to pay the account.
D. Recipients usually respond only if they disagree with the information on the request.
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93. Which of the following items is not requested on a standard bank account balance
confirmation form?
A. The principal amount paid on a direct liability.
B. Maturity date of a direct liability.
C. Description of collateral for a direct liability.
D. The interest rate of a direct liability.

94. 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 monthly bank statement reconciliation is performed by the same employee who
maintains the perpetual inventory records.
D. The accounts receivable subsidiary ledger and accounts payable subsidiary ledger are
maintained by the same person.

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

96. 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. Consider the reduced audit effort with respect to the physical count of inventory as a
scope limitation.
B. Make or observe some physical counts of the inventory, recompute certain inventory
calculations, and test certain inventory transactions.
C. Consider the report of the outside inventory-taking firm to be an acceptable alternative
procedure to the observation of physical inventories.
D. Not reduce the extent of work on the physical count of inventory.

97. The following statements relate to the form and content of working papers. Which is false?
A. The auditor should prepare working papers which are sufficiently complete and detailed
to provide an overall understanding of the audit.
B. 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.
C. Working papers should include documentation of every matter the auditor considers
during the audit.
D. Working papers should include the auditors reasoning on all significant matters which
require the exercise of judgment, together with his/her conclusion thereon.

98. The following are examples of special purpose frameworks, except

A. A tax basis of accounting for a set of financial statements that accompany an entitys
tax return.
B. The cash receipts and disbursements basis of accounting for cash flow information that
an entity may be requested to prepare for creditors.
C. Philippine Financial Reporting Standards (PFRS) promulgated by the Financial Reporting
Standards Council (FRSC).
D. The financial reporting provisions of a contract (for example, a financing agreement).
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99. Which of the following statements is correct with respect to an auditors report expressing
an opinion on a specific element on a financial statement?
A. 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.
B. The materiality determined for a specific element of a financial statement may be lower
than the materiality determined for the entitys complete set of financial statements.
C. Such a report can only be issued if the auditor is also engaged to audit the entire set of
financial statements.
D. The attention devoted to the specific element is usually less than it would be if the
financial statements as a whole were audited.

100. Which of the following statements concerning the auditors use of assertions is correct?
A. The auditor may combine the assertions about transactions and events with the
assertions about account balances.
B. In every audit engagement, the auditor should use the assertions 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.
C. There should always be a separate assertion related to cutoff of transactions and events.
D. The completeness assertion deals only with whether all transactions and events that
should have been recorded have been recorded.

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