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CEBU CPAR CENTER Mandaue City, Cebu

AUDITING THEORY FINAL PREBOARD EXAMINATION INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. MARK THE LETTER OF YOUR CHOICE WITH A VERTICLE LINE ON THE ANSWER SHEET PROVIDED. STRICTLY NO ERASURES ARE ALLOWED.

1. Which of the following best describes “high level of assurance”?

a. It refers to the professional accountant having obtained evidence based on procedures agreed upon between the practitioner and the intended users to be satisfied that findings be reported to the intended users.

b. It refers to the professional accountant having obtained sufficient external and internal appropriate evidence to be satisfied that the subject matter is plausible in the circumstances.

c. It refers to the professional accountant having obtained sufficient appropriate evidence to conclude that the subject matter conforms in all material respects with identified suitable criteria.

d. It refers to the professional accountant having obtained sufficient evidence to conclude that he has no knowledge of any required modifications to be made in the financial statements in order for them to conform of prescribed criteria.

2. Which statement is incorrect regarding assurance engagement risk?

a. Engagement risk is the risk that the practitioner will express an inappropriate conclusion that the subject matter conforms in all material respects with suitable criteria.

b. All components of the engagement risk model will be significant for all assurance engagements.

c. The extent to which the practitioner considers the relevant components of engagement risk will be affected by the engagement circumstances.

d. Business risk is not part of engagement risk and does not affect the application of Philippine Standard on Assurance Engagements.

3. Which statement is incorrect regarding an engagement to perform agreed-upon procedures?

a. An auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.

b. The recipients of the report must form their own conclusions from the report by the auditor. c. The report is restricted to those parties that have agreed to the procedures to be performed. d. The report on factual findings is expressed in the form of negative assurance.

4. Which of the following engagements provides third parties the highest level of assurance about

the client’s financial statements? a. Audit c. Agreed-upon procedures b. Review d. Compilation

5. In which of the following situations can third parties assume responsibility of the auditor

regarding association with financial information? a. When the auditor attaches a report to that information. b. When the auditor consents to the use of the auditor's name in a professional connection. c. Either a or b. d. Neither a nor b.

6. A concept relating to the accumulation of the audit evidence necessary for the auditor to

conclude that there are no material misstatements in the financial statements taken as a whole. a. Reasonable assurance c. Moderate assurance b. Positive assurance d. Negative assurance

7. Which statement is incorrect regarding the external auditor’s consideration of the work of

internal auditing? a. The external auditor should consider the activities of internal auditing and their effect, if any,

on external audit procedures.

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b. The external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit and developing an effective audit approach.

c. During the course of planning the audit, the external auditor should perform a preliminary assessment of the internal audit function when it appears that internal auditing is relevant to the external audit of the financial statements in specific audit areas.

d. When the external auditor intends to use specific work of internal auditing, the external auditor need not evaluate and test that work to confirm its adequacy for the external auditor's purposes.

8. The independent auditor lends credibility to client’s financial statements by

a. Maintaining a clear-cut distinction between management’s representations and the auditor’s representation.

b. Testifying under oath about client’s financial statements. c. Stating in the auditor’s management letter that the examination was made in accordance

with generally accepted auditing standards. d. Attaching an auditor’s opinion to the client’s financial statements.

9. Which of the following is responsible for the fairness of representations made in financial

statements? a. The independent auditor. c. The client's management. b. The internal auditor. d. The audit committee.

10. The exposure period allowed for each exposure draft of PSA to be considered by the

organizations and persons to whom it is sent for comment is generally a. Four months c. Two months b. Three months d. Six months

11. Which statement is incorrect regarding the pronouncements of ASPC?

a. The PSAs and Interpretations may also have application, as appropriate, to other related activities of auditors.

b. PSAs contain basic principles and essential procedures (identified in bold type black lettering) together with related guidance in the form of explanatory and other material.

c. PSAs need only be applied to material matters. d. The Interpretations have the same authority as the PAPSs.

12. The following should be occupied only by a duly registered CPA, except

a. Any position in any business or company in the private sector which requires supervising the recording of financial transactions.

b. Any position in any business or company in the private sector which requires preparation of financial statements.

c. Any position in any business or company in the private sector which requires coordinating with the internal auditors for the audit of financial statements.

d. The position of the dean that supervises the BSA program of an educational institution. 13. Which of the following is not represented in the Auditing and Assurance Standards Council?

a. Board of Accountancy c. Bureau of Internal Revenue b. Bangko Sentral ng Pilipinas d. Securities and Exchange Commission

14. A study, appraisal, or review by the BOA or its duly authorized representatives, of the quality of

audit of financial statements through a review of the quality control measures instituted by an Individual CPA, Firm or Partnership of CPAs engaged in the practice of public accountancy. a. Peer review c. Analytical review b. Quality review d. Administrative review

15. Emong, CPA is applying for renewal of his professional license. He is exempted from the CPE

requirements a. If he is at least 65 years old. b. If he is working abroad and he has been out of the country for at least two years

immediately prior to the date of renewal. c. Either a or b. d. Under no circumstances.

16. The following statements relate to RA 9298. Which statement is true?

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a. The Professional Regulation Commission has the authority to remove any member of the Board of Accountancy for negligence, incompetence, or any other just cause.

b. Insanity is not a ground for proceeding against a CPA. c. A person shall be considered to be in the professional practice of accounting if, as an officer

in a private enterprise, he makes decisions requiring professional accounting knowledge. d. After three years, subject to certain conditions, the Board of Accountancy may order the

reinstatement of a CPA whose certificate of registration has been revoked. 17. There is a need for assurance that all services obtained from a professional accountant are

carried out to the highest standards of performance. This statement relates to a. Credibility c. Quality of Services b. Professionalism d. Confidence

18. Indicate the normal pattern of development for a professional accountant.

I. A period of work experience. II. High standard of general education. III. Specific education, training and examination in professionally relevant subjects a. I, II, III b. II, III, I c. III, II, I d. II, I, III

19. A partner or employee of the firm serving as an officer or as a director on the board of an

assurance client will most likely create a. Intimidation threat c. Advocacy threat b. Self-review threat d. Familiarity threat

20. Which of the following least likely create a self-review threat?

a. A former officer, director or employee of the assurance client serve as a member of the assurance team.

b. A director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement has been a member of the assurance team or partner of the firm.

c. Assisting an audit client in matters such as preparing accounting records or financial statements.

d. A firm, or network firm, provides internal audit services to an audit client. 21. This process may include, particularly in the case of large complex audits, requesting

personnel not otherwise involved in the audit to perform certain additional procedures. a. Direction c. Review b. Supervision d. All of these

22. Which of the following is least likely a factor that affects the extent of quality control

procedures? a. The size of the firm. c. The number of practice offices. b. The type of clients that the firm serves. d. The nature of the practice.

23. Which statement is incorrect regarding the auditor’s responsibility to consider fraud and error in

the audit of financial statements? a. The auditor is entitled to accept records and documents as genuine. b. The auditor is may be held responsible for the prevention of fraud and error. c. The auditor should consider the risk of material misstatements in the financial statements

resulting from fraud or error. d. The risk of not detecting a material misstatement resulting from error is lower than the risk

of not detecting a material misstatement resulting from fraud. 24. Which statement is incorrect regarding “fraud risk factors”?

a. Using the auditor’s knowledge of the business, the auditor may identify events or conditions that provide an opportunity, a motive or a means to commit fraud, or indicate that fraud may already have occurred.

b. A missing document, an out of balance general ledger, or an analytical procedure that does not make sense may be the result of circumstances other than fraud.

c. Fraud risk factors indicate the existence of fraud because they often have been present in circumstances where frauds have occurred.

d. The presence of fraud risk factors may affect the auditor’s assessment of inherent risk or control risk.

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25. Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and least likely to be detected by an auditor? a. Understating the sales journal. b. Overstating the accounts receivable control account. c. Overstating the accounts receivable subsidiary ledger. d. Understating the cash receipts journal.

26. Example of the type of information that may come to the auditor's attention that may indicate

that noncompliance with laws or regulations has occurred most likely include a. Payments for specified services or loans to consultants, related parties, employees or

government employees. b. Payments for goods or services made to the country from which the goods or services

originated. c. Purchasing at prices significantly above or below market price. d. Sales commissions or agent's fees that appear reasonable in relation to those ordinarily

paid by the entity or in its industry or to the services actually received. 27. When the auditor knows that an illegal act has occurred, the auditor must

a. Issue an adverse opinion. b. Withdraw from the engagement. c. Report it to the proper government authorities. d. Consider the effects on the financial statements, including the adequacy of disclosure.

28. Which statement is correct regarding the auditor’s communications of audit matters with those

charged with governance? a. The auditor’s communications of matters include all audit matters of governance interest. b. An audit of financial statements is designed to identify all matters that may be relevant to

those charged with governance. c. The auditor’s communications with those charged with governance may be made orally or

in writing. d. None of the above.

29. It is in the interest of both client and auditor that the auditor sends an engagement letter,

preferably before a. The performance of substantive testing. b. The commencement of the engagement. c. The completion of audit. d. Before the issuance of audit report.

30. When a change in the type of engagement from higher to lower level of assurance is

reasonably justified, the report based on the revised engagement (choose the incorrect one) a. Should not contain a separate paragraph that refers to the original engagement. b. Should not refer to any procedures that may have been performed in the original

engagement. c. Should qualify the opinion due to scope limitation. d. Omits reference to the original engagement.

31. A basic tool used by the auditor to control the audit work and review the progress of the audit.

a. Audit program c. Engagement letter. b. Progress flowchart d. Time and Expense Summary

32. Which of the following is not normally a planning procedure?

a. Assess the conclusions reached and the evaluation of the overall financial statement presentation through the use analytical procedures.

b. Consider the risk of the existence of related-party transactions. c. Consider the nature of the audit reports expected to be rendered. d. Identify items likely to require adjustments.

33. An understanding of the client’s business and industry and knowledge about the company’s

operations are essential for doing an adequate audit. For a new client, most of this information is obtained a. From the predecessor auditor. c. At the client’s premises. b. From the SEC. d. From the permanent file.

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34. The management’s assessment of the entity’s ability to continue as a going concern covers a period of: a. Not longer than 12 months from balance date. b. At least 12 months from the balance sheet date. c. Not longer than 12 months from the date of audit report. d. At least 12 months from the date of audit report.

35. Which of the following would an auditor most likely use in determining the auditor’s preliminary

judgment about materiality? a. The results of the internal control questionnaire. b. The contents of the management representation letter c. The entity’s annualized interim financial statements. d. The anticipated sample size of the planned substantive tests.

36. How can the audit program best be described at the beginning of the audit process?

a. Tentative. c. Conclusive. b. Comprehensive. d. Optional.

37. Which of the following is appropriate about risk assessment?

a. Detection risk is eliminated if an auditor were to examine 100 percent of the account balance or class of transactions

b. There is an inverse relationship between detection risk and the combined level of inherent and control risk.

c. The assessed level of inherent and control risk can be sufficiently low, thus resulting to eliminating the need for substantive tests.

d. Audit risk may be more appropriately determined by assessing inherent and control risk separately.

38. Which of the following shows an appropriate relationship between the acceptable level of

detection risk and the combined level of inherent and control risk? Auditor’s Assessment of

a.

Inherent Risk Low

Control Risk High

Acceptable level of Detection Risk__ Lower

b. Low High Medium c. High High Lower d. Low Low Higher

39. Which of the following most directly illustrates inherent risk?

a. Inadequate segregation of duties. b. Confirmation of receivables by an auditor fails to detect a material misstatement. c. ABC Company, a client company, lacks sufficient working capital to continue operations. d. A client fails to discover employee fraud on a timely basis because bank accounts are not

reconciled monthly. 40. Which of the following is a valid statement about the assessment of control risk?

a. There is a positive relationship between detection risk and the combined level of inherent and control risk.

b. The auditor should consider the assessed levels of inherent and control risks in determining the nature, timing, and extent of substantive procedures required to eliminate audit risk.

c. Misstatements discovered by conducting substantive procedures may cause the auditor to modify the previous assessment of control risk.

d. The assessed level of inherent and control risks can be sufficiently low in order to eliminate the auditor’s need to perform substantive tests on some assertions.

41. The auditor should perform which of the following as risk assessment procedure?

a. Analytical procedures c. Recalculation b. Confirmation d. Reperformance

42. Which of the following is least likely a potential benefit of effectiveness and efficiency for an

entity’s internal control that IT provides? a. Enhance the timeliness, availability, and accuracy of information. b. Enhance the ability to monitor the performance of the entity’s activities and its policies and

procedures.

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c. Eliminate the risk that controls will be circumvented. d. Consistently apply predefined business rules and perform complex calculations in

processing large volumes of transactions or data. 43. Control environment

a. Consists of the policies and procedures that help ensure that management directives are carried out.

b. Includes the governance and management functions and the attitudes, awareness, and actions of those charged with governance and management concerning the entity’s internal control and its importance in the entity.

c. Is the entity’s process for identifying business risks relevant to financial reporting objectives and deciding about actions to address those risks, and the results thereof.

d. Consists of the procedures and records established to initiate, record, process, and report entity transactions (as well as events and conditions) and to maintain accountability for the related assets, liabilities, and equity.

44. Which of the following situations will normally result to increase in the extent of audit

procedures? a. Decrease in the risk of material misstatement. b. Decrease in the degree of assurance the auditor plans to obtain. c. Decrease in materiality level. d. None of the above.

45. The auditor should determine overall responses to address the risks of material misstatement

at the financial statement level. Such responses most likely include a. Assigning less experienced staff. b. Emphasizing to the audit team the need to maintain professional skepticism in gathering

and evaluating audit evidence. c. Performing predictable further audit procedures. d. Performing substantive procedures at an interim date instead of at period end.

46. Which statement is incorrect regarding the nature, timing and extent of tests of controls?

a. Those controls subject to testing by performing inquiry combined with inspection or reperformance ordinarily provide more assurance than those controls for which the audit evidence consists solely of inquiry and observation.

b. If the auditor plans to rely on controls that have not changed since they were last tested, the auditor should test the operating effectiveness of such controls at least once in every third audit.

c. The length of time period between retesting controls is a matter of professional judgment, but cannot exceed three years.

d. The more the auditor relies on the operating effectiveness of controls in the assessment of risk, the greater is the extent of the auditor’s tests of controls.

47. Which of the following statements is correct regarding the auditor’s primary objective in

performing procedures to obtain an understanding of the internal control structure? a. The primary objective is to provide the auditor with an evaluation of the consistency of

application of management’s policies. b. The primary objective is to provide the auditor with knowledge necessary for audit planning. c. The primary objective is to provide the auditor with evidential matter to use in assessing

inherent risk. d. The primary objective is to provide the auditor with a basis for modifying tests of controls.

48. Which of the following would most likely indicate internal control deficiency for the revenue

cycle (including cash receipts)? a. Credit is granted by a credit department. b. Cash receipts received in the mail are received by a secretary with no recordkeeping

responsibility. c. Cash is deposited weekly. d. Cash disbursements over P100,000 does not require two signatures on the check.

49. The following statements relate directly to test of controls except

a. May involve comparisons of financial information with nonfinancial information. b. Setting the planned assessed level of control risk at the maximum will eliminate these tests. c. Often performed concurrently with obtaining an understanding of internal control.

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d. Inquire of the accounts receivable clerk regarding the effectiveness of the computer program in updating accounts receivable balances.

50. After obtaining an understanding of an entity’s internal controls, an auditor may assess control

risk at the maximum for some assertions because the auditor: a. Believes internal control activities are unlikely to be effective. b. Determines that internal control is not well-documented. c. Performs tests of controls to restrict detection of risk to an acceptable level. d. Identifies control activities that are likely to prevent material misstatements.

51. The report of the service organization auditor on the suitability of design (Type A) will not

ordinarily include an opinion by the service organization auditor that: a. The description of the service organization's accounting and internal control systems,

ordinarily prepared by the management of the service organization is accurate. b. The systems' controls have been placed in operation. c. The accounting and internal control systems are operating effectively based on the results

from the tests of control. d. The accounting and internal control systems are suitably designed to achieve their stated

objectives. 52. Which statement is correct regarding the audit evidence?

a. The greater the risk, the less audit evidence is likely to be required. b. The higher the quality, the more may be required c. Merely obtaining more audit evidence may not compensate for its poor quality. d. Obtaining audit evidence relating to a particular assertion is a substitute for obtaining audit

evidence regarding another assertion. 53. Assertions used by the auditor fall into three categories. Existence is included under

a. Assertions about classes of transactions and events for the period under audit. b. Assertions about account balances at the period end. c. Assertions about presentation and disclosure. d. All of the above.

54. Which of the following statements is incorrect regarding the reliability of audit evidence?

a. Oral representation by the client management is not a valid evidence. b. Audit evidence obtained directly by the auditor is more reliable than that one provided by

the client management. c. The effectiveness of accounting and internal control adds to the reliability of internal audit

evidence. d. While internal audit evidence is considered to be acceptable, the auditor usually prefers

audit evidence form external sources. 55. Which statement is incorrect regarding the auditor’s attendance at physical inventory counting?

a. When inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding its existence and condition by attendance at physical inventory counting unless impracticable.

b. When the quantities are to be determined by a physical inventory count and the auditor attends such a count, the auditor would ordinarily observe count procedures and perform test counts.

c. To obtain assurance that management’s procedures are adequately implemented, the auditor would observe employees’ procedures and perform test counts.

d. The physical inventory count cannot be conducted at a date other than period end. 56. The auditor considers the status of legal matters up to

a. The date of the audit report. c. The issuance of financial statements. b. The balance sheet date. d. Up to the date of receipt of letter from lawyers.

57. Which statement is correct regarding valuation and disclosure of long-term investments?

a. Regardless of the amount of long-term investments, the auditor should obtain sufficient appropriate audit evidence regarding their valuation and disclosure.

b. Audit procedures regarding long-term investments ordinarily include considering evidence as to whether the entity has the ability to sell the investment in the near term.

c. If the carrying amounts do not exceed market quotations, the auditor would consider whether a write-down is required.

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d. If there is an uncertainty as to whether the carrying amount will be recovered, the auditor would consider whether appropriate adjustments and/or disclosures have been made.

58. In relation to opening balances, which of the following may cause the auditor to disclaim his

opinion? a. The inability of the auditor to obtain sufficient appropriate audit evidence concerning

opening balances. b. The opening balances contain misstatements that could materially affect the current

period’s financial statements and such misstatements have not been corrected. c. The current period’s accounting policies have not been consistently applied in relation to

opening balances and the effect of such change is not properly accounted for or disclosed. d. The assessed substantial doubt about the entity’s ability to continue as a going concern as

indicated by consistent negative cash flows. 59. The auditor notices significant fluctuations in key elements of the company's financial

statements. If management is unable to provide an acceptable explanation, the auditor should a. Withdraw from the engagement. b. Consider the matter a scope limitation. c. Perform additional audit procedures to investigate the matter further. d. Intensify the examination with the expectation of detecting management fraud.

60. In evaluating the assumptions on which the estimate is based, the auditor would least pay

particular attention to assumptions which are a. Subjective. b. Sensitive to variation. c. Susceptible to material misstatement. d. Reasonable in light of actual results in prior periods.

61. Which statement is correct regarding auditing fair value measurements and disclosures?

a. Many measurements based on estimates, including fair value measurements, are inherently precise.

b. Assumptions used in fair value measurements are similar in nature to those required when developing other accounting estimates.

c. Underlying the concept of fair value measurements is a presumption that the entity will be liquidated.

d. The measurement of fair value may be relatively complex for assets that are bought and sold in active and open markets.

62. The auditor needs to be aware of the existence of related parties and transactions between

such parties. Which of the following is the least likely reason? a. GAAP in the Philippines require disclosure in the financial statements of certain related

party relationships and transactions. b. Related parties and transactions between such parties are considered unusual features of

business. c. The source of audit evidence affects the auditor's assessment of its reliability. d. A related party transaction may be motivated by other than ordinary business

considerations. 63. Which of the following is most likely a procedure that would be performed by the auditor

regarding subsequent events? a. Reading the minutes of the meetings of shareholders, the board of directors and audit

executive committees held throughout the audit year. b. Reading the entity’s latest available interim financial statements. c. Send second requests to the client’s customer who failed to respond to initial accounts

receivable confirmation requests. d. Review the cutoff bank statements for several months after the year-end.

64. A client acquired 30% of its outstanding capital stock after year-end and prior to the completion

of the auditor’s fieldwork. The auditor should a. Disclose the acquisition in the opinion paragraph of the auditor’s report. b. Advise management to adjust the balance sheet to reflect the acquisition. c. Issue pro forma financial statements giving effect to the acquisition as if it had occurred at

year-end. d. Advise management to disclose the acquisition in the notes to the financial statements.

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65. If a representation by management is contradicted by other audit evidence, the auditor should

a. Withdraw from the engagement. b. Investigate the circumstances and, when necessary, reconsider the reliability of other

representations made by management. c. Issue a qualified or adverse opinion. d. Issue a qualified or disclaimer of opinion.

66. Which statement is incorrect regarding the auditor’s use of the work of an expert?

a. Determination of amounts using specialized techniques or methods, for example, an actuarial valuation will likely require the services of an expert.

b. The auditor's education and experience enable the auditor to be knowledgeable about business matters in general.

c. The auditor need not assess the objectivity of the expert since latter may be related to the entity.

d. When planning to use the work of an expert, the auditor should assess the professional competence of the expert.

67. Which statement is incorrect regarding inter-bank confirmations?

a. The requirement for bank confirmation arises from the need of the bank's management and its auditors to confirm the financial and business relationships.

b. Inter-bank relationships are different in nature from those between the bank and a non-bank customer.

c. The auditor should decide from which bank or banks to request confirmation, have regard to such matters as size of balances, volume of activity, degree of reliance on internal controls, and materiality within the context of the financial statements.

d. It is not usual practice to request a response only if the information submitted is incorrect or incomplete.

68. Which statement is correct regarding small entities?

a. There is concentration of ownership and management in a small number of individuals (often a single individual).

b. An entity owned by another enterprise cannot be regarded as a “small entity”. c. The meaning of “small entity” gives consideration only to the size of an entity. d. Small entities do not have internal controls.

69. The inability of the client to prepare certain audit requirements may most likely lead the auditor

to a. Withdraw from the engagement. b. Express qualified opinion or a disclaimer. c. Express qualified or adverse opinion. d. Express unqualified opinion with explanatory paragraph.

70. Which statement is incorrect regarding working papers?

a. The auditor should document matters which are important in providing evidence to support the audit opinion.

b. The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit.

c. Portions of or extracts from the working papers may be made available to the entity at the discretion of the auditor since working papers are substitute for the entity’s accounting records.

d. Working papers would include the auditor’s reasoning on all significant matters which require the exercise of judgment, together with the auditor’s conclusion thereon.

71. Which of the following statements about working papers is correct?

a. Working papers are not permitted to be used as a reference source by the client. b. The auditor should document the understanding of the client's internal control obtained to

plan the audit. c. Working papers may be regarded as a substitute for the client's accounting records. d. When reporting on comparative financial statements, the independent auditor may discard

working papers after two years.

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72. Identify as to whether sampling or nonsampling risk, following the same order: I. The auditor might reach a different conclusion based on samples used from the conclusion

if it were the entire population subjected to the same audit procedure II. The auditor might use inappropriate procedures III. The auditor might misinterpret the evidence a. Nonsampling, sampling, nonsampling b. Sampling, nonsampling, nonsampling c. Sampling, nonsampling, sampling d. Nonsampling, sampling, sampling

73. Which of the following is correct about sampling risks?

a. The risk of incorrect acceptance relates to the efficiency of the audit. b. The risk of assessing control risk too low relates to the efficiency of the audit. c. Sampling risk includes the auditor’s failure to recognize errors in the documents examines

for the chosen sample. d. The likelihood of assessing control risk too high is the risk that the sample selected to test

controls does not support the auditor’s planned assessed level of control risk when the true operating effectiveness of the control structure justifies such an assessment.

74. Identify the sample selection method used, following the same order:

I. Selecting items using a constant interval between selections; the first interval having a random start.

II. Selecting items from the entire population with no intention to include or exclude specific units

III. All items in the population or within each stratum have a known chance of selection a. Systematic, random, haphazard. b. Systematic, haphazard, random. c. Haphazard, systematic, random. d. Random, systematic, haphazard.

75. When sampling for attributes, which of the following would decrease sample size?

a b c d Intended reliance internal controls Increase Decrease Increase Decrease Tolerable deviation rate Decrease Increase Increase Increase Expected deviation rate Increase Decrease Decrease Decrease Risk of assessing control risk too low Decrease Increase Increase Decrease

76. In substantive testing, which of the following would increase sample size?

a b c d Assessment of inherent risk Increase Increase Increase Decrease Reliance on internal controls Increase Decrease Decrease Increase Tolerable error Decrease Increase Decrease Increase Expected error Increase Decrease Increase Decrease Risk of incorrect acceptance Decrease Increase Decrease Increase

77. A CIS environment least likely affects

a. The overall objective and scope of an audit. b. The procedures followed by the auditor in obtaining a sufficient understanding of the

accounting and internal control systems. c. The consideration of inherent risk and control risk through which the auditor arrives at the

risk assessment. d. The auditor’s design and performance of tests of control and substantive procedures

appropriate to meet the audit objective. 78. A CIS environment

a. Exists when a computer of any type or size is involved in the processing by the entity of financial information of significance to the audit, whether that computer is operated by the entity or by a third party.

b. Is the electronic transmission of documents between organizations in a machine-readable form.

c. Consists of the policies and procedures that the entity implements and the IT infrastructure (hardware, operating systems, etc.) and application software that it uses to support business operations and achieve business strategies.

d. A communications network that serves users within a confined geographical area.

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79. Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-prepared data files rather than manually prepared files? a. It is usually more difficult to detect transposition errors. b. Transactions are usually authorized before they are executed and recorded. c. It is usually easier for unauthorized persons to access and alter the files. d. Random error associated with processing similar transactions in different ways is usually

greater. 80. Gateway is

a. A hardware and software solution that enables communications between two dissimilar networking systems or protocols.

b. A device that forwards frames based on destination addresses. c. A device that connects and passes packets between two network segments that use the

same communication protocol. d. A device that regenerates and retransmits the signal on a network.

81. Database systems are distinguished by two important characteristics:

a. Data sharing and data independence. b. Data dictionary and database administration. c. Data sharing and database administration. d. Data dictionary and data independence.

82. General CIS controls generally do not include:

I. Controls over processing and computer data files II. Organization and management controls III. Development and maintenance controls IV. Delivery and support controls V. Monitoring controls VI. Controls over input VII. Controls over output a. All of the above c. I, II, III, IV and V b. II, III, IV and V d. I, VI and VII

83. An auditor anticipates assessing control risk at a low level in a computerized environment.

Under these circumstances, on which of the following procedures would the auditor initially focus? a. Programmed control procedures c. Application control procedures b. Output control procedures d. General control procedures

84. Which of the following is not explicitly included in the opening paragraph of an audit report?

a. Identification of the financial statements that have been audited. b. A statement by the auditor that the audit provides a reasonable basis for the opinion. c. Statement that the financial statements are the responsibility of the entity’s management. d. Statement that the responsibility of the auditor is to express an opinion on the financial

statements based on his audit. 85. Which of the following is least likely a description of audit contained in the scope paragraph of

the auditor’s report? a. Examining evidence to support the financial statement amounts and disclosures. b. Assessing the accounting principles used in the preparation of the financial statements. c. Assessing the significant estimates made by management in the preparation of the financial

statements. d. Evaluating the overall financial statement presentation.

86. The auditor issued a qualified opinion covering the financial statements of Client A for the year

ended December 31, 2004. The reason for the qualification was a departure from GAAP. In presenting comparative statements for the years ended December 31, 2004 and 2005, the client revised the 2004 financial statements to correct the previous departure from GAAP. The auditor's 2005 report on the 12/31/04 and 12/31/05 comparative financial statements will a. Express unqualified opinions on both the 2004 and 2005 financial statements. b. Express a qualified opinion on the 2004 financial statements and an unqualified opinion on

the 2005 statements. c. Retain the qualified opinion covering the 2004 statements, but add an explanatory

paragraph describing the correction of the prior departure from GAAP.

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d. Render qualified audit opinions for both 2004 and 2005 financial statements given the 2005 carryover effect of the 2004 error.

87. When the financial statements of the prior period were not audited, the incoming auditor

should: a. Insist that an audit of prior year’s financial statements must be made. b. Obtain sufficient appropriate audit evidence that the corresponding figures meet the

requirements of the relevant financial reporting framework.’ c. Not allow the inclusion of the corresponding figures in the financial statements of the

current period. d. Disclaim his opinion and treat the unaudited corresponding figures as basis of scope

limitation. 88. When a misstatement in the financial statements exists, but is unlikely to affect the decisions of

a reasonable user, it would be appropriate to issue a. An unqualified opinion. c. A qualified opinion. b. A disclaimer of opinion. d. An adverse opinion.

89. The audit report date is important to users because it indicates the

a. Last day of the fiscal period. b. Last day of the auditor’s responsibility for the review of significant events that occurred after

the date of the financial statements. c. Date on which the financial statements were filed with the SEC. d. Last day on which users may institute a lawsuit either client or auditor.

90. When the principal auditor concludes that the work of the other auditor cannot be used and the

principal auditor has not been able to perform sufficient additional procedures regarding the financial information of the component audited by the other auditor, the principal auditor will likely issue a. Unqualified opinion. b. Unqualified opinion with explanatory paragraph c. Qualified or adverse opinion d. Qualified or disclaimer of opinion

91. When there is a limitation on the scope of the audit that results to a disclaimer of opinion, the

three paragraphs of the auditor report are: Introductory Scope Opinion a. Modified Modified Modified b. Unmodified Modified Modified c. Unmodified Unmodified Modified d. Modified Unmodified Modified

92. If an amendment to other information in a document containing audited financial statements is

necessary and the entity refuses to make the amendment, the auditor would most likely issue a. Unqualified opinion. b. Unqualified opinion with explanatory paragraph c. Qualified or adverse opinion d. Qualified or disclaimer of opinion

93. The auditor’s report on summarized financial statements should include

a. An opinion as to whether the information in the summarized financial statements is presented fairly, in all material respects.

b. An opinion as to whether the information in the summarized financial statements is consistent with the audited financial statements from which it was derived.

c. A statement of negative assurance. d. A description of the auditor’s factual findings including sufficient details of errors and

exceptions found. 94. A CPA's report on agreed-upon procedures related to management's assertion about an

entity's compliance with specified requirements should contain: a. A statement of limitations on the use of the report. b. An opinion about whether management's assertion is fairly stated. c. Negative assurance that control risk has not been assessed. d. An acknowledgment of responsibility for the sufficiency of the procedures.

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95. Which of the following procedures does an accountant in a compilation engagement of a

nonpublic entity ordinarily perform? a. Reading the financial statements to consider whether they are free of obvious mistakes in

the application of accounting principles. b. Obtaining written representations from management indicating that the compiled financial

statements will not be used to obtain credit. c. Making inquiries of management concerning actions taken at meetings of the stockholders

and the board of directors. d. Applying analytical procedures designed to corroborate management's assertions that are

embodied in the financial statement components. 96. Which of the following should the auditor perform in a review engagement ?

a. Understand matters that are relevant to the financial statements. b. Understand the entity’s internal control system. c. Observe the physical count of inventory. d. Inquire of legal counsel of pending litigations.

97. An auditor’s report on financial statements prepared in accordance with another

comprehensive basis of accounting should include all of the following except: a. An opinion as to whether the basis of accounting used is appropriate under the

circumstances. b. An opinion as to whether the financial statements are presented fairly in conformity with the

comprehensive basis of accounting. c. Reference to the note to the financial statements that describes the basis of presentation. d. A statement that the basis of presentation is a comprehensive basis of accounting other

than generally accepted accounting principles. 98. An auditor's report would be designated as a special report when it is issued in connection with

financial statements that are a. For an interim period and are subjected to a limited review. b. Unaudited and are prepared from a client's accounting records. c. Prepared in accordance with a comprehensive basis of accounting other than generally

accepted accounting principles. d. Purported to be in accordance with generally accepted accounting principles but do not

include a presentation of the Statement of Cash Flows. 99. Eddie Lares, a partner in a CPA firm performs free accounting service for a club of which he is

a treasurer. The most preferable way for Lares to issue the yearly statements of the club is a. On the firm's letterhead with a disclaimer on lack of independence. b. On the firm's letterhead with the caption that the statement is unaudited. c. On the club's letterhead with Lares signing as treasurer. d. On plain paper with no reference to Lares as a CPA.

100. The CPA who regularly examines the Marcos corporate financial statements was asked to

prepare pro forma income statements for the next three years based on the corporation's operating assumptions for the internal use of the client. The CPA should a. Reject the engagement since the statements are to be based on assumptions. b. Reject the engagement because the statements are for internal use only. c. Accept the engagement provided full disclosure is made of the assumptions used and the

extent of the responsibility of the CPA. d. Accept the engagement provided the president of Marcos Corp. certifies in writing that the

statement will be solely for internal use. 101. When there is a change from manual processing to CIS environment in an audit client, the

overall objective and scope of an audit: a. Is modified. c. Is unchanged. b. Is extended. d. Becomes unlimited.

102. Which of the following is the least affected by the use of computer?

a. The auditor’s design and performance of tests of controls. b. The procedures followed by the auditor in obtaining a sufficient understanding of the

accounting and internal control. c. The auditor’s objective of considering internal control.

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d. The consideration of inherent risk and control risk through which the auditor arrives at the risk assessment.

103. Which of the following procedures to be performed by the auditor least requires the auditor

to have specialized CIS skills in an audit? a. Obtain a sufficient understanding of the accounting and internal control systems affected by

the CIS environment. b. Determine the applicability of using statistical sampling instead of judgmental sampling. c. Design and perform appropriate tests of controls and substantive procedures. d. Determine the effect of the CIS environment on the assessment of overall risk and of risk at

the account balance and class of transaction level. 104. Which of the following CIS personal computer environment is a general control?

a. A regular reconciliation of record counts or has totals. b. A system of authorization and documentation of modification of the systems and

applications software. c. A system of transaction logs and batch balancing. d. A practice of direct supervision.

105. Which of the following is least likely an advantage of using personal computers?

a. They are small enough to be transportable. b. Their operating system software is equally comprehensive as those found in larger

computerized environments. c. They are relatively inexpensive to acquire and maintain. d. There is an ease of using personal computers.

106. Which of the following is not a type of installation of personal computers?

a. A workstation connected to a server. b. a stand-alone workstation operated by a single user or a number of users at different

times. c. A workstation which is part of a local area network of personal computers. d. A stand-alone workstation operated by a single user or a number of users

simultaneously using the same or different applications. 107. A computer program that attaches itself to a legitimate program or data file and users it as a

transport mechanism to reproduce itself without the knowledge of the user: a. Trojan horse c. Hacker b. Virus d. Backup

108. It refers to the plans made by the entity to obtain access to comparable hardware, software

and data in the event of their failure, loss or destruction. a. Simulation. c. Documentation. b. Backup. d. Parallel run.

109. Which of the following is the least concern of the auditor when he intends to rely on internal

accounting controls that relate to stand-alone personal computers? a. Segregation of duties and balancing controls. b. Access to the personal computers and files. c. A system of authorization before a transaction is executed. d. Use of third-party software.

110. How does the stand-alone personal computer environment of the client entity affect the

auditor’s audit procedures? a. The auditor often assumes that control risk is reasonably low. b. Because of the advantage provided by the use of stand-alone personal computers, the

audit procedures are restricted to low level. c. The auditor usually concentrates the audit efforts on substantive tests at or near the end of

the year. d. To be cost effective, the auditor makes an extensive review of general CIS and CIS

application controls as basis of reducing the audit efforts to be performed on detailed testing of balances and transaction classes.

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111. Computer-assisted audit may include the use of: A B C D Client software YES YES NO NO Auditor’s own software programs YES NO YES NO

112. Which of the following may not be a purpose of using computer-audit software?

a. Add transactions or balances in the data files for comparison with control account balances. b. Select accounts or transactions for detailed testing. c. To evaluate the collectibility of accounts receivable. d. To examine data bases for unusual items.

113. When the client has a large number of transactions that are processed by stand-alone

personal computer, the auditor: a. May do tests of controls which he intends to rely on, if appropriate, to reduce the assessed

control risk, and do audit work on the data at a preliminary date. b. Understand the control environment and flow of transactions but must omit preliminary audit

tests. c. May do tests of controls and if those controls can be relied on, do interim testing and

omit year end audit testing. d. Usually omits the understanding of control environment because the stand-alone personal

computer environment is not reliable. 114. The establishment of a framework of overall control over the computer information systems

activities to provide a reasonable level of assurance that the overall objectives of internal control are achieved

1. general controls in computer information systems 2. application controls in computer information systems 3. control environment in information systems 4. control procedures in information systems

115. In a computer system environment the GAAS most affected are the

a. general standards c. general and fieldwork standards b. fieldwork and reporting standards d. entire GAAS standards

116. A company that executes transactions and maintains related accountability or records

transactions and processes related data is a. related party c. service organization b. external auditor d. expert

117. These represent information obtained by the auditor in arriving at the conclusions on which

the audit opinion is based a. audit documentation c. audit assertions b. audit evidence d. audit conclusions

118. Generally, the auditor prefers external evidence to internal evidence. This is a measure of

a. Relevance c. analysis b. Appropriateness d. evidence gathering

19. It refers to the correspondence of an evidence to a particular audit objective:

a. Competence or reliability. c. Persuasiveness. b. Relevance. d. Corroboration.

20. A transaction or event is recorded at the properly amount and revenue or expense is allocated

at the proper period is a financial assertion of: a. occurrence c. valuation b. completeness d. measurement

21. The three major categories of documentary audit evidence are:

1. Documentary audit evidence created by third parties and held by the client entity 2. Documentary audit evidence created and held by third parties 3. Documentary audit evidence created and held by the client eneity What is the order of their degree of reliability? a. 1, 3, 2 b. 3, 1, 2

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c. 2, 1, 3 d. 2, 3, 1

22. An audit schedule which is designed to show the activity in a general ledger account during the

period under audit, tying together the beginning and ending balances: a. Analysis c. reconciliation b. tests of transactions d. vouching

23. Confirmation is required for

A B C D Accounts receivable Yes Yes No Yes Cash Yes Yes No No Inventory Yes No Yes No Accounts payable Yes No Yes No

24. The negative request form of accounts receivable confirmation is useful particularly when the

Assessed level of control Number of small Consideration by the Risk relating to receivable is balances is recipient is

a. Low Many Likely b. Low Few Unlikely c. High Few Likely d. High Many Likely

25. According to PSA 500 (Audit Evidence), which of the following is incorrect of audit evidence? a. Audit evidence may be obtained entirely from substantive procedures. b. The appropriateness of the audit evidence is the measure of both the quality and quantity of

audit evidence. c. Audit evidence is obtained form an appropriate mix of tests of control and substantive

procedures. d. Substantive procedures mean tests performed to obtain audit evidence to detect material

misstatements in the financial statements. 26.Which of the following is an invalid statement about audit evidence?

a. Ordinarily, audit evidence regarding one assertion will compensate for failure to obtain audit evidence regarding another assertion.

b. Ordinarily, audit evidence is obtained regarding each financial assertion. c. The nature, timing and extent of substantive tests will vary depending on the assertions. d. Audit tests can provide audit evidence about more than one assertion.

27. The following statements are discussions about financial assertions and audit evidence. Which

of them is(are) correct? II. When in substantial doubt as to a material financial statement assertion, the auditor likely

attempt to obtain sufficient appropriate audit evidence to remove such doubt. III. Difficulty and cost involved is a valid basis for omitting a necessary procedure. IV. In obtaining audit evidence, the auditor needs to consider the relationship between the cost

of obtaining it and its usefulness. V. When there are inconsistent evidences provided by two different sources, the auditor may

need to modify his audit opinion. a. II, III, IV c. II, IV b. I, III d. I, III, IV

28. The detailed instruction for the collection of a type of audit evidence that is to be obtained at

some time during the audit: a. Audit program. c. Audit technique. b. Audit procedure. d. Working papers.

29. The following statements relate to audit evidence, except:

a. The competence of audit is likely improved by selecting a larger sample size or different population items.

b. The evidence obtained from a source outside the client entity is more persuasive than that one obtained from within.

c. When a client’s accounting and internal controls are effective, the evidence obtained is more reliable.

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d. The evidence obtained directly by the auditor through physical examination, computation, observation, or confirmation is more competent than an information obtained indirectly.

30. What is meant by timeliness of audit evidence?

a. Evidence is more reliable for balance sheet accounts when it is obtained as close to the balance sheet date as possible.

b. Evidence is more reliable for income statement accounts if the sample comes from part of the period as close to balance sheet date as possible.

c. Tests of transactions should be performed close to balance sheet date. d. Tests of account balances must be performed before the balance sheet date.

31. In which of the following would the judgment of the auditor be least critical?

a. Verification of the authenticity of the transfer certificate of title. b. Determination of the material level. c. Assessment of the management plans of action in order to improve cash flows. d. Assessing the reasonableness of the estimates made by the management.

32. The auditor’s attendance to client’s physical inventory count would not enable him to

a. Physically inspect inventory items. b. Review the accuracy of pricing the inventory items. c. Observe compliance with the prescribed procedures for recording and controlling the

results of the count. d. Provide evidence as to reliability of management’s procedures.

33. If, after performing procedures, the auditor is unable to obtain sufficient, appropriate evidence

concerning opening balances, the auditor may express modified opinion on financial statements during and as of year end of the current period:

Income Statement Balance Sheet Qualified Disclaimer Qualified Disclaimer a. Yes Yes Yes Yes b. Yes Yes No No c. Yes No Yes No d. No No Yes Yes

34. Which of the following is not an auditor’s concern in obtaining sufficient appropriate audit

evidence for initial engagements? a. opening balances do not contain misstatements that materially affect the current period’s

financial statements b. the prior period’s closing balances have been correctly brought forward to the current

period or when appropriate, have been restated c. appropriate accounting policies are consistently applied or changes to accounting policies

have been properly accounted for and adequately disclosed d. opening balances have been audited by a competent auditor

35. The following considerations need to be observed by the auditor when he has to observe

physical inventory count or he has to perform alternative procedures: A B C D Inherent, control and detection risks That are related to inventory

YES

YES

NO

NO

The timing of the count YES YES NO NO A requirement for an expert NO YES YES YES The nature of accounting and internal control systems used regarding inventory

NO

YES

YES

NO

36. Auditors try to identify predictable relationships when using analytical procedures.

Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

a. Accounts payable c. Accounts receivable b. Payroll expense d. Advertising expense

37. Which of the following best describes the primary purpose of audit procedures?

a. To detect errors or irregularities. b. To comply with generally accepted accounting principles.

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c. To gather corroborative evidence. d. To verify the accuracy of account balances.

38. The following statements were made in a discussion of audit evidence by two independent

auditors. Which statement is untrue? a. “I am seldom convinced beyond all doubt about all aspects of the financial statements being

audited.” b. “I would not undertake that procedure because, at best, the results would only be

persuasive and I'm looking for convincing evidence.” c. “I evaluate the degree of risk involved in deciding the kind of evidence I will gather.” d. “I evaluate the usefulness of the evidence I can obtain against the cost to obtain it.”

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

40. In which of the following would the judgment of the auditor be least critical?

a. Verification of the authenticity of the transfer certificate of title. b. Determination of the material level. c. Assessment of the management plans of action in order to improve cash flows. d. Assessing the reasonableness of the estimates made by the management.

41. Which of the following is the least required of the audit working papers?

a. Confidentiality of information included in the working papers. b. Safe custody of the working papers c. Substitute for the entity’s accounting records d. Retention for a period sufficient to meet the needs of the practice

42. Which of the following statements about working papers is incorrect?

a. Working papers are not permitted to be used as a reference source by the client. b. The auditor should document the understanding of the client’s internal control in order to

plan the audit. c. Working papers are not be regarded as a substitute for the client’s accounting records. d. When reporting on comparative financial statements, the independent auditor may not

discard working papers after two years. 43. As a result of tests of controls, an auditor assessed control risk too low and decreased

substantive testing. This assessment occurred because the true deviation rate in the population was

a. Less than the risk of assessing control risk too low, based on the auditor’s sample. b. Less than the deviation rate in the auditor’s sample. c. More than the risk of assessing control risk too low, based on the auditor’s sample. d. More than the deviation rate in the auditor’s sample.

44. When designing audit procedures, the auditor should determine appropriate means of selecting

items for testing. The means available to the auditor are the following except: a. Selecting all items b. Selecting specific items identified by the auditor c. Selecting specific items identified by the client d. Audit sampling

45. Selecting all items for testing may least be appropriate for one of the following:

a. tests of controls b. substantive tests c. when population constitute of small number of large value items d. when the repetitive nature of calculation makes 100% test more cost effective

46. Which of the following factors would least be considered by the auditor in selecting items for

examination a. Items to test procedures c. High value or key items b. Items to obtain information d. Items under a specific amount

47. A sample in which every possible combination of items in the population has an equal chance

of constituting the sample is

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a. representative sample c. random sample b. statistical sample d. judgment sample

48. A sample in which the characteristics in the sample are the same as those of the population is a (an) a. representative sample c. random sample b. statistical sample d. judgment sample

49. Sampling risk occurs when the auditor a. uses an inappropriate audit procedure b. fails to recognize exceptions c. tests less than the entire population d. identifies weaknesses in client’s internal control system

50. When the auditor goes through a population and selects items for the sample without regard to their size, source or other distinguishing characteristics, this is called a. block selection c. systematic selection b. haphazard selection d. statistical selection

51. The risk that the auditor is willing to take of accepting a control as being effective when it is not is a. tolerable deviation rate c. estimated population deviation rate b. acceptable risk of overreliance d. finite correction factor

52. The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the: a. Allowable risk of tolerable misstatement. c. Type I Error b. Preliminary estimates of materiality levels. d. Type 2 Error

53. The true deviation rate is

a. the number of deviations in the population divided by the sample size b. the number of items in the population multiplied by the number of deviations in the sample c. the number of deviations in the sample divided by the sample size d. the number of deviations in the population divided by the population size

54. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling

helps an auditor to plan the a. sample size c. nature and timing of test b. sampling risk d. report to be issued

55. Difference estimation, ratio estimation, and mean-per-unit estimation are all techniques that

constitute the general class of methods called a. attribute sampling c. block sampling b. monetary unit sampling d. variables sampling

56. The method used to measure the estimated total error amount in a population when there is

both a recorded value and an audited value for each item in the sample is a. difference estimation c. ratio estimation b. mean-per-unit estimation d. monetary-unit sampling

57. If the size of the errors in the population is proportionate to the recorded value of the population

items, smaller sample sizes will be generated using a. difference estimation c. ratio estimation b. mean-per-unit estimation d. monetary unit sampling

58. The auditor is concerned with the audited value rather than the error amount of each item in the

sample when using a. difference estimation c. ratio estimation b. mean-per-unit estimation d. monetary-unit sampling

59. Which of the following is not a characteristic of probability-proportional-to-size sampling?

a. Using a sample selection technique in which the same account balance could be selected more than once.

b. Selecting a random starting point and then sampling every nth peso unit.

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c. Combining negative and positive peso error items d. Defining the sampling unit as an individual peso and not as an individual account balance.

60. What is the relationship of the following factors to sample size when using sampling on tests of

controls? a b c d

Expected Deviation Rate Inverse Direct Inverse Direct Reliance on internal control

Inverse Inverse Direct Direct

Tolerable deviation rate Direct Inverse Direct Inverse Population Size No Effect No Effect Direct No Effect

61. What is the relationship of the following factors to sample size when using sampling on

substantive tests? a b c d

Reliance on other substantive test

Inverse Direct Inverse Direct

Overall assurance required Inverse Direct Direct Inverse Tolerable Error Inverse Inverse Inverse Direct Confidence Level Direct Inverse Direct Direct

62. Identify as to whether sampling or nonsampling risk, following the same order:

a b c D The auditor tests only few samples

Sampling Sampling Non-sampling Sampling

The auditor uses inappropriate procedures

Non-sampling Non-sampling Non-sampling Non-sampling

The auditor fails to recognize error in sample

Sampling Non-sampling Non-sampling Non-sampling

The auditor haphazardly chose the samples

Sampling Sampling Non-sampling Non-sampling

63. This refers to the approximation of the amount of the item in the absence of a precise means of

measurement a. Allocation c. Provision b. Accounting Estimate d. Allowance

64. Which of the following statements is incorrect regarding audit of fair value measurements and

disclosures? a. The auditor should obtain an understanding of the entity's process for determining fair value

measurements and disclosures and of the relevant control procedures sufficient to develop an effective audit approach

b. Management is responsible for making the fair value measurements and disclosures included in the financial statements while the auditor is responsible for ensuring that fair value measurements are correct

c. The auditor should evaluate whether the fair value measurements and disclosures in the financial statements are in accordance with GAAP in the Philippines

d. Where alternative methods for measuring fair value are available under GAAP in the Philippines, or where the method of measurement is not prescribed, the auditor should evaluate whether the method of measurement is appropriate in the circumstances under GAAP in the Philippines

65. A representation letter issued by a client

a. is essential for the preparation of the audit program b. is a substitute for testing c. does not reduce the auditor’s responsibility d. reduces the auditor’s responsibility only to the extent it is relied upon

66. When the external auditor intends to use specific work of internal auditing, the external auditor

should a. evaluate and test that work to confirm the adequacy for external auditor’s purposes b. reperform the procedures done by the internal auditors c. place no reliance since internal auditors are not independent of management

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d. ask management to attest to the independence of the internal auditors 67. In which of the following cases would an auditor not need the services of an expert?

a. The measurement of work completed and to be completed on contracts in progress b. Legal opinions concerning interpretations of agreements, statutes and regulations c. Valuations of certain types of assets like land and buildings d. Evaluating the company’s internal control

68. When determining the need to use the work of an expert, the auditor would least likely

consider: a. the materiality of the financial statement item being considered; b. the risk of misstatement based on the nature and complexity of the matter being considered c. availability of the expert d. the quantity and quality of other audit evidence available.

69. If as a result of the work of the expert, the auditor decides to issue a modified auditor’s report,

the auditor should not a. describe the work of the expert b. refer and name the expert even without permission c. describe the extent of the expert’s work d. refer and name the expert only after obtaining permission from the expert

70. These represent information in the financial statements regarding distinguishable components

or industry and geographical aspects of an entity a. related party information b. segment information c. confirmation d. document accompanying financial statements

71. A matter whose outcome depends on future actions or events not under the direct control of the

entity but may affect the financial statements a. Uncertainty c. subsequent event b. accounting estimate d. projection

72. An auditor has a responsibility to evaluate the going concern status of an audit client for a (an)

a. Period of one year from the balance sheet date. b. Period of one year from the date of the auditor’s report. c. Period of two years from the balance sheet date d. Indefinite period.

73. All the following may indicate substantial doubt as to an entity’s ability to continue as a going

concern except a. Work stoppages c. Purchase of catastrophe insurance b. Legal proceedings d. Operating losses

74. When audited financial statements are presented in a client’s document containing other

information, the auditor should a. Perform inquiry and analytical procedures to ascertain whether the other information is

reasonable. b. Add an explanatory paragraph to the auditor’s report without changing the opinion on the

financial statements. c. Perform the appropriate substantive auditing procedures to corroborate the other

information. d. Read the other information to determine that it is consistent with the audited financial

statements. 75. Audit report may be addressed to the:

Audited Entity Stockholder Chair of the Audit Committee

a. No Yes No b. Yes Yes No c. Yes Yes Yes d. Yes No Yes

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76. Which of the following is not a basic element of an audit report? a. opening paragraph c. opinion paragraph b. scope paragraph d. starting and completion dates of the audit

77. Which of the following is not a basis of dating the audit report?

a. when the audit fee was collected b. as of the completion date of the audit c. as of any date earlier than the date on which the financial statements are signed of

approved by management d. upon completion of fieldwork

78. Which of the following procedures is most likely relevant to obtain an information about events

or conditions that cast significant doubt on the entity’s ability to continue as a going concern beyond the period assessed by management? a. Inspection c. Inquiry b. Observing d. Analysis

79. If the auditor believes that the entity will not be able to continue as a going concern and the

financial statements are prepared on a going concern, the auditor’s report should include a. Unqualified opinion with explanatory paragraph c. Adverse opinion b. Qualified opinion d. Disclaimer of opinion

80. The management denied the auditor’s request that management has to extend its assessment

of its going concern ability. However, the auditor’s other procedures are sufficient to assess the appropriateness of management use of the going concern assumption in the preparation of the financial statements. The auditor should issue: a. unqualified opinion c. adverse opinion b. unqualified opinion with explanatory paragraph d. disclaimer of opinion

81. If comparative financial statements are presented and the present auditor has audited both years, the auditor should: a. reissue the report c. redate the report b. dual date the report d. update the report

82. When financial statements of a prior period are presented on a comparative basis with financial

statements of the current period, the continuing auditor is responsible for a. expressing dual dated report b. updating the report on the previous financial statements only if there has been no change in

the opinion c. updating the report on the previous financial statements only if the previous audit report

was qualified and the reasons for the qualification no longer exists d. updating the report on the previous financial statements regardless of the opinion

previously expressed 83. The objective of the consistency standard is to provide assurance that

a. there are no variations in the format and presentation of financial statements b. substantially different transactions and events are not accounted for on an identical basis c. the auditor is consulted before material changes are made in the application of accounting

principles d. the comparability of financial statements between periods is not materially affected by

changes in accounting principles without disclosure 84. A dual dated report contains the dates of a subsequent event and the date the

a. auditor completed fieldwork in the client’s office b. financial statements were prepared c. subsequent event was resolved d. audit report was delivered

85. If the principal auditor decides to take responsibility for the work of other auditors, the principal

auditor should: a. modify the opening paragraph b. modify the opening and opinion paragraphs c. modify all three paragraphs d. issue a standard audit report

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86. If an auditor wishes to emphasize a matter included in the financial statements by adding an explanatory paragraph, the following paragraphs should also be modified a. introductory paragraph c. opinion paragraph b. scope paragraph d. none

87. Which of the following modifications of the standard auditor’s report does not require an

explanatory paragraph? a. reference to other auditors c. scope limitation b. inconsistency d. adverse opinion

88. When determining whether an exception is highly material, the extent to which the exception

affects different parts of the financial statements must be considered. This is referred to as a. Materiality c. financial analysis b. Pervasiveness d. ratio analysis

89. The following circumstances result in a modified, but unqualified report, except:

a. inconsistent application of accounting principles b. emphasis of a related party transaction that is disclosed in a footnote c. Lack of disclosure of a restriction on payment of dividends d. Other auditors perform work for which the principal auditor does not assume responsibility

90. According to PSA 710, how does a CPA issue his independent audit report when comparative

financial statements are issued by the client? a. For comparative financial statements, the auditor’s report refers to each period that financial

statements are presented. b. The auditor’s report only refers to the financial statements of the current period. c. The auditor’s report refers to the financial statements of the current period and explicitly

refers to the financial statements of the prior period(s) as corresponding figures. d. The auditor issues separate audit report for financial statements of different periods.

91. Special purpose auditor’s report is one issued in connection with the independent audit of

financial information other than the auditor’s report and may include the following, except: a. compliance with contractual agreements b. summarized financial statements c. specified accounts, elements of accounts, or items in a financial statement d. financial statements prepared in conformity with generally accepted accounting principles

92. Which of the following is a criteria least likely required of assurance engagements

a. a subject matter c. an engagement process b. a two-party relationship d. a suitable criteria

93. Which of the following describes “high level of assurance”?

a. It refers to the professional accountant having obtained sufficient external and internal appropriate evidence to be satisfied that the subject matter is plausible in the circumstances

b. It refers to the professional accountant having obtained evidence based on procedures agreed upon between the practitioner and the intended users to be satisfied that findings be reported to the intended users

c. It refers to the professional accountant having obtained sufficient appropriate evidence to conclude that the subject matter conforms in all material respects with identified suitable criteria

d. it refers to the professional accountant having obtained sufficient evidence to conclude that he has no knowledge of any required modifications to be made in the financial statements in order for them to conform of prescribed criteria

94. Which of the following is least likely an objective of an assurance engagement?

a. The engagement is intended to prevent the issuance of materially misleading information b. The engagement is intended to enhance the credibility of information about a subject matter c. An assurance engagement is intended for a professional accountant to express a

conclusion that provides the intended uses with a level of assurance about the subject matter

d. The engagement is intended to provide a level of assurance to be issued by a professional accountant about the information of being in conformity, in all material respects , with suitable criteria

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95. Which of the following is least likely a subject matter of an assurance engagement? a. Data c. Compliance with regulations b. Systems and processes d. Degree of loyalty of employees to their employer

96. Which of the following is least likely an objective of an assurance engagement?

a. The engagement is intended to prevent the issuance of materially misleading information b. The engagement is intended to enhance the credibility of information about a subject matter c. An assurance engagement is intended for a professional accountant to express a

conclusion that provides the intended uses with a level of assurance about the subject matter

d. The engagement is intended to provide a level of assurance to be issued by a professional accountant about the information of being in conformity, in all material respects , with suitable criteria

97. Which is incorrect of the intended user?

a. the intended user is the person or class of persons for whom the professional accountant prepares the report for a specific use or purpose

b. The intended user is always limited to the addressee of the professional accountant’s report c. The responsible party may also be one of the intended users d. The intended user(s) may not be the addressee of the professional accountant’s report

98. The objective of a review of interim financial information of a public entity is to provide an

accountant with a basis for reporting whether a. material modifications should be made to conform with GAAP b. a reasonable basis exists for expressing an updated opinion regarding the financial

statements that were previously audited c. condensed financial statements or pro forma financial information should be included in a

registration statement d. the financial statements are presented fairly in accordance with GAAP

99. Which of the following is not a basis of the auditor in determining the specific nature, timing

and extent of review procedures? a. Assessed level of control risk b. The extent to which a particular item is affected by management judgment c. The materiality of transactions and account balances d. Any knowledge acquired by carrying out reviews of the financial statements for prior

periods. 100. Which of the following is incorrect about agreed-upon procedures engagement?

a. An engagement to perform agreed-upon procedures may involve the auditor in performing certain procedures concerning individual items of financial data.

b. Users of the agreed-upon procedures report assess for themselves the procedures and findings reported by the auditor and draw their conclusion from the auditor’s work.

c. The auditor should be independent of the financial data or financial statements where agreed procedures have to be applied.

d. The report is restricted to those parties that have agreed to the procedures to be preformed.

101. A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should contain:

a. A statement of limitations on the use of the report. b. An opinion about whether management's assertion is fairly stated. c. Negative assurance that control risk has not been assessed. d. An acknowledgment of responsibility for the sufficiency of the procedures.

102. When compiling financial statements of an non-public entity, an accountant should

a. review agreements with financial institutions for restrictions of cash balances b. understand the accounting principles and practices of the entity’s industry c. inquiry of key personnel concerning related parties and subsequent event d. perform ratio analyses of the financial data of comparable periods

- end of examination- Good Luck!

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Documents

assurance engagements

positive assurance

moderate assurance

reasonable assurance

engagement risk model

form of negative assurance

engagement circumstances

professional accountant