AUDITING THEORY TEST BANK

1. Which of the following is not an assurance service?

A. Examination of prospective financial information
B. Audit of historical financial statements
C. Review of financial statements
D. Compilation of financial information
2. What type of assurance engagement is involved when the practitioner
expresses a positive form of conclusion?
A. Limited assurance engagement
B. Positive assurance engagement
C. Reasonable assurance engagement
D. Absolute assurance engagement
3. What type of assurance engagement is involved when the practitioner
expresses a negative form of conclusion?
A. Reasonable assurance engagement
B. Negative assurance engagement
C. Assertion-based assurance engagement
D. Limited assurance engagement
4. Assurance engagement risk is the risk
A. That the practitioner expresses an inappropriate conclusion when the
subject matter information is materially misstated.
B. Of expressing an inappropriate conclusion when the subject matter
information is not materially misstated.
C. Through loss from litigation, adverse publicity, or other events arising in
connection with a subject matter reported on.
D. Of expressing an inappropriate conclusion when the subject matter
information is either materially misstated or not materially misstated.
5. Reducing assurance engagement risk to zero is very rarely attainable or cost
beneficial as a result of the following factors, except
A. The use of selective testing.
B. The fact that much of the evidence available to the practitioner is
persuasive rather than conclusive.
C. The practitioner may not have the required assurance knowledge and skills
to gather and evaluate evidence.
D. The use of judgment in gathering and evaluating evidence and forming
conclusions based on that evidence.
6. When performing a compilation engagement, the accountant is required to
A. Assess internal controls.
B. Make inquiries of management to assess the reliability and completeness of
the information provided.
C. Verify matters and explanations.
D. Obtain a general knowledge of the business and operations of the entity.
7. 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.
8. Which of the following best describes the reason why independent auditors
report on financial statements?
A. A management fraud may exist and it is more likely to be detected by
independent auditors.
B. Different interests may exist between the company preparing the
statements and the persons using the statements.
C. A misstatement of account balances may exist and is generally corrected as
the result of the independent auditors work.
D. Poorly designed internal control may be in existence.

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9. Which of the following professionals has primary responsibility for the

performance of an audit?
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.
10. What is the proper organizational role of internal auditing?
A. To serve as an independent, objective assurance and consulting activity
that adds value to operations.
B. To assist the external auditor in order to reduce external audit fees.
C. To perform studies to assist in the attainment of more efficient operations.
D. To serve as the investigative arm of the audit committee of the board of
directors.
11. Which of the following terms best describes the audit of a taxpayers return by
a BIR auditor?
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit.
12. An objective of a performance audit is to determine whether an entitys
A. Operational information is in accordance with government auditing
standards.
B. Specific operating units are functioning economically and efficiently.
C. Financial statements present fairly the results of operations.
D. Internal control is adequately operating as designed.
13. The internal auditing departments responsibility for deterring fraud is to
A. Establish an effective internal control system.
B. Maintain internal control.
C. Examine and evaluate the system of internal control.
D. Exercise operating authority over fraud prevention activities.
14.

Internal auditors review the adequacy of the companys internal control

system primarily to
A. Help determine the nature, timing, and extent of tests necessary to achieve
audit objectives.
B. Determine whether the internal control system provides reasonable
assurance that the companys objectives and goals are met efficiently and
economically.
C. Ensure that material weaknesses in the system of internal control are
corrected.
D. Determine whether the internal control system ensures that financial
statements are fairly presented.

15. The members of the Professional Regulatory Board of Accountancy shall be

appointed by the
A. Philippine Institute of CPAs (PICPA).
B. Professional Regulation Commission (PRC).
C. President of the Philippines.
D. Association of CPAs in Public Practice (ACPAPP).
16. The following statements relate to the term of office of the chairman and
members of the Board of Accountancy (BOA). Which is false?
A. The chairman and members of the BOA shall hold office for a term of three
(3) years.
B. Any vacancy occurring within the term of a member shall be filled up for the
unexpired portion of the term only.
C. No person who has served two successive complete terms as chairman or
member shall be eligible for reappointment until the lapse of two (2) years.
D. Appointment to fill up an unexpired term is not to be considered as a
complete term.

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17.

The Board of Accountancy has the power to conduct an oversight into the
quality of audits of financial statements through a review of the quality control
measures instituted by auditors in order to ensure compliance with the
accounting and auditing standards and practices. This power of the BOA is
called
A. Quality assurance review
C. Appraisal
B. Peer review
D. Quality control

18. Which of the following shall be issued to examinees who pass the CPA licensure
examination?
A. Certificate of registration and death certificate.
B. Professional identification card and warrant of arrest.
C. Certificate of registration and professional identification card.
D. Warrant of arrest and death certificate.
19. Which of the following statements concerning the issuance of Certificates of
Registration and Professional Identification Cards to successful examinees is
correct?
A. The Certificate of Registration issued to successful examinees is renewable
every three (3) years.
B. The Professional Identification Card issued to successful examinees shall
remain in full force and effect until withdrawn, suspended or revoked in
accordance with RA 9298.
C. The BOA shall not register and issue a Certificate of Registration and
Professional Identification Card to any successful examinee of unsound
mind.
D. The BOA may, after the expiration of three (3) years from the date of
revocation of a Certificate of Registration, reinstate the validity of a revoked
Certificate of Registration.
20. Any person who shall violate any of the provisions of the Accountancy Act or
any of its implementing rules and regulations promulgated by the Board of
Accountancy subject to the approval of the PRC, shall, upon conviction, be
punished by
A. A fine of not more than P50,000.
B. Imprisonment for a period not exceeding two years.
C. A fine of not less than P50,000 or by imprisonment for a period not
exceeding two years or both.
D. Lethal injection.
21. Which of the following statements concerning the use of firm or partnership
name is incorrect?
A. In the case of an individual CPA, he/she shall do business under his/her
registered name with the BOA and the PRC and as printed in his/her CPA
certificate (for example, Juan Puruntong, CPA).
B. In the case of a firm, it shall do business under its duly registered and
authorized firm name appearing in the registration documents issued by the
Department of Trade and Industry (DTI) and other government offices and
such firm name shall include the real name of the sole proprietor as printed
in his/her CPA certificate (for example, Arnulfo Gumamela and Associates).
C. In the case of a registered partnership, it shall do business under its name
as indicated in its current Articles of Partnership and Certificate of
Registration issued by the Securities and Exchange Commission (SEC) (for
example, Tanya, Sam, and Jervi, CPAs).
D. A CPA shall practice only under an individual, firm, or partnership name in
accordance with Philippine laws and shall not include any fictitious name
but may indicate specialization.
22. The following statements relate to CPE credit units. Which is incorrect?
A. The total CPE credit units for registered accounting professionals shall be
sixty (60) credit units for three (3) years, provided that a minimum of fifteen
(15) credit units shall be earned in each year.
B. Any excess credit units in one year may be carried over to the succeeding
years within the three-year period.
C. Excess credit units earned may be carried over to the next three-year
period including credit units earned for doctoral and masters degrees.

D. One credit hour of CPE program, activity or source shall be equivalent to

one (1) credit unit.

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23. Which of the following statements best explains why the CPA profession has
found it essential to establish ethical standards and means for ensuring their
observance?
A. Vigorous enforcement of an established code of ethics is the best way to
prevent unscrupulous acts.
B. Ethical standards that emphasize excellence in performance over material
rewards establish a reputation for competence and character.
C. A distinguishing mark of a profession is its acceptance of responsibility to
the public.
D. A requirement for a profession is to establish ethical standards that stress
primarily a responsibility to clients and colleagues.
24. The threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures from the client is known
as
A. Intimidation threat
B. Familiarity threat.
C. Self-interest threat.
D. Advocacy threat.
25. Familiarity threat could be created under the following circumstances except
A. A professional accountant accepting gifts from a client whose value is
inconsequential or trivial.
B. Senior personnel having a long association with the assurance client.
C. A director or officer of the client or an employee in a position to exert
significant influence over the subject matter of the engagement having
recently served as the engagement partner.
D. A member of the engagement team having a close or immediate family
member who is a director or officer of the client.
26. Which of the following circumstances may create advocacy threat for a
professional accountant in public practice?
A. The firm promoting shares in an audit client.
B. A firm issuing an assurance report on the effectiveness of the operation of
financial systems after designing or implementing the systems.
C. A firm being threatened with dismissal from a client engagement.
D. A firm being concerned about the possibility of losing a significant client.
27. The following circumstances may create intimidation threats, except
A. Being threatened with dismissal or replacement in related to a client
engagement.
B. Being pressured to reduce inappropriately the extent of work performed in
order to reduce fees.
C. Being threatened with litigation.
D. A member of the assurance team being, or having recently been, a director
or officer of the client.
28. Which of the following is an example of engagement-specific safeguards in the
work environment?
A. Advising partners and professional staff of those assurance clients and
related entities from which they must be independent.
B. Disclosing to those charged with governance of the client the nature of
service provided and extent of fees charged.
C. A disciplinary mechanism to promote compliance with the firms policies
and procedures.
D. Published policies and procedures to encourage and empower staff to
communicate to senior levels within the firm any issue relating to
compliance with the fundamental principles that concerns them.
29. Financial interests may be held through an intermediary (for example, a
collective investment vehicle, estate or trust).
When control over the
investment vehicle or the ability to influence investment decisions exists, the
code defines that financial interest to be a/an

A.
B.
C.
D.

Direct financial interest.

Material direct financial interest.
Indirect financial interest.
Material indirect financial interest.

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30. A direct financial interest or a material indirect financial interest in the audit
client of a member of the audit team or his immediate family member may
create a significant self-interest threat. Which of the following safeguards
would be least likely considered to eliminate the threat or reduce it to an
acceptable level?
A. Discuss the matter with those charged with governance of the audit client.
B. Dispose of the direct financial interest prior to the individual becoming a
member of the audit team.
C. Dispose of the indirect financial interest in total or dispose of a sufficient
amount of it so that the remaining interest is no longer material prior to the
individual becoming a member of the audit team.
D. Remove the member of the audit team from the audit engagement.
31. The concept of materiality is least important to an auditor when considering
the
A. Effects of a direct financial interest in the client upon the auditors
independence.
B. Decision whether to use positive or negative confirmations of accounts
receivable.
C. Adequacy of disclosure of a clients illegal act.
D. Discovery of weaknesses in a clients internal control.
32. A close business relationship between a firm or a member of the audit team, or
a member of that individuals immediate family, and the audit client or its
management may create
A. Self-interest and intimidation threats
B. Self-review and familiarity threats
C. Advocacy and self-review threats
D. Self-interest and self-review threats
33. Which of the following would not generally create a threat to independence?
A. The purchase of goods and services from an assurance client by the firm (or
from a financial statement audit client by a network firm) or a member of
the assurance team provided that the transaction is in the normal course of
business and on an arms length basis.
B. A partner or employee of the firm or a network firm serves as Company
Secretary for a financial statement audit client.
C. Determining which recommendations of the firm should be implemented.
D. Reporting, in a management role, to those charged with governance.
34. These are fees calculated on a predetermined basis relating to the outcome or
result of a transaction or the result of the work performed.
A. Contingent fees
B. Fixed fees
C. Predetermined fees
D. Commissions.
35. Which of the following statements concerning publicity is incorrect?
A. Booklets and other documents bearing the name of a professional
accountant and giving technical information for the assistance of staff or
clients may be issued to such persons, other professional accountants or
other interested parties.
B. Professional accountants who author books or articles on professional
subjects may state their name and professional qualifications; give the
name of their organization; and give any information as to the services that
the firm provides.
C. Appropriate newspapers or magazines may be used to inform the public of
the establishment of a new practice, of changes in the composition of a
partnership of professional accountants in public practice, or of any
alteration in the address of a practice.
D. A professional accountant may develop and maintain a website in the
Internet in such suitable length and style which may also include

announcements, press releases, publications and such other necessary and

factual information.
36. The primary purpose of establishing quality control policies and procedures for
deciding whether to accept a new client is to
A. Anticipate before performing any fieldwork whether an unqualified opinion
can be expressed.
B. Enable the CPA firm to attest to the reliability of the client.
C. Satisfy the CPA firms duty to the public concerning the acceptance of new
clients.
D. Minimize the likelihood of association with clients whose management lacks
integrity.

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37. After evaluating the significance of the threat created by an actual or

threatened litigation, the following safeguards should be applied to reduce the
threat to an acceptable level, except
A. Disclosing to the audit committee, or others charged with governance, the
extent and nature of the litigation.
B. If the litigation involves a member of the assurance team, removing that
individual from the assurance team.
C. Involving an additional professional accountant in the firm who was not a
member of the assurance team to review the work or otherwise advise as
necessary.
D. Withdraw from, or refuse to accept, the assurance engagement.
38. The following circumstances create advocacy threats for a professional
accountant in public practice except
A. Promoting shares in an audit client.
B. Acting as an advocate on behalf of an audit client in litigation or disputes
with third parties.
C. Acting as campaign manager for the president of a client who is running for
a public office.
D. A member of the assurance team having a significant close business
relationship with an assurance client.
39. The following statements relate to the provision of legal services to an audit
client. Which is incorrect?
A. The provision of legal services to an audit client involving matters that
would not be expected to have a material effect on the financial statements
may create a self-review threat.
B. Legal services to support an audit client in the execution of a transaction
(e.g., contract support) may create a self-review threat.
C. Acting for an audit client in the resolution of a dispute or litigation in such
circumstances when the amounts involved are material in relation to the
financial statements of the audit client would create advocacy and selfreview threats so significant no safeguards could reduce the threats to an
acceptable level.
D. The appointment of a partner or an employee of the firm or network firm as
General Counsel for legal affairs to an audit client would create self-review
and advocacy threats that are so significant no safeguards could reduce the
threats to an acceptable level.
40. For audits of financial statements of listed entities, the engagement partner
should not issue the auditors report until the completion of the
A. Engagement Quality Control Review
B. Management Review
C. Engagement Team Review
D. Engagement Partner Review
41. The engagement partner should take responsibility for the direction,
supervision, and performance of the audit engagement in compliance with
professional standards and regulatory and legal requirements, and for the
auditors report that is issued to be appropriate in the circumstances.
Supervision includes the following, except
A. Tracking the progress of the audit engagement.

B. Addressing significant issues arising during the audit engagement,

considering their significance, and modifying the planned approach
appropriately.
C. Informing the members of the engagement team of their responsibilities.
D. Identifying matters for consultation or consideration by more experienced
engagement team members during the audit engagement.
42. Which of the following would an auditor most likely use in determining the
auditors preliminary judgment about materiality?
A. The anticipated sample size of the planned substantive tests.
B. The entitys annualized interim financial statements.
C. The results of the internal control questionnaire.
D. The contents of the management representation letter.

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43. Analytical procedures used in planning an audit should focus on
A. Reducing the scope of tests of controls and substantive tests.
B. Providing assurance that potential material misstatements will be identified.
C. Enhancing the auditors understanding of the clients business and
identifying areas of potential risk.
D. Assessing the adequacy of the available evidential matter.
44. Which of the following would not be considered an analytical procedure?
A. Estimating payroll expense by multiplying the number of employees by the
average hourly wage rate and the total hours worked.
B. Projecting an error rate by comparing the results of a statistical sample with
the actual population characteristics.
C. Computing accounts receivable turnover by dividing credit sales by the
average net receivables.
D. Developing the expected sales based on the sales trend of the prior five
years.
45. Which of the following auditing procedures most likely would assist an auditor
in identifying related party transactions?
A. Inspecting correspondence with lawyers for evidence of unreported
contingent liabilities.
B. Vouching accounting records for recurring transactions recorded just after
the balance sheet date.
C. Reviewing confirmations of loans receivable and payable for indications of
guarantees.
D. Performing analytical procedures for indications of possible financial
difficulties.
46. Which of the following matters should be considered by the auditor in
developing the overall audit strategy?
A. Important characteristics of the entity, its business, its financial
performance and its reporting requirements including changes since the
date of the prior audit.
B. Conditions requiring special attention, such as the existence of related
parties.
C. The setting of materiality levels for audit purposes.
D. All of the above.
47. A measure of how willing the auditor is to accept that the financial statements
may be materially misstated after the audit is completed and an unmodified
opinion has been issued is the
A. Inherent risk.
B. Acceptable audit risk.
C. Control risk.
D. Detection risk.
48. Which of the following is not one of the three primary objectives of effective
internal control?
A. Reliability of financial reporting.
B. Efficiency and effectiveness of operations.
C. Compliance with laws and regulations.

D. Assurance of elimination of business risk.

49. An auditor should consider two key issues when obtaining an understanding of
a clients internal controls. These issues are
A. The effectiveness and efficiency of the controls.
B. The frequency and effectiveness of the controls.
C. The design and implementation of the controls.
D. The implementation and efficiency of the controls.
50. An auditor should obtain sufficient knowledge of an entitys information
system, including the related business processes relevant to financial
reporting, to understand the
A. Policies used to detect the concealment of fraud.
B. Process used to prepare significant accounting estimates.
C. Safeguards used to limit access to computer facilities.
D. Procedures used to assure proper authorization of transactions.

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51. After gaining an understanding of internal control and assessing the risks of
material misstatement, an auditor decided to perform tests of controls. The
auditor most likely decided that
A. Additional evidence to support a further reduction in control risk is not
available.
B. It is not possible or practicable to reduce the risks of material misstatement
at the assertion level to an acceptably low level with audit evidence
obtained only from substantive test procedures.
C. There were many internal control weaknesses that could allow
misstatements to enter the accounting system.
D. An increase in the assessed level of control risk is justified for certain
financial statement assertions.
52. An auditor may decide to assess control risk at the maximum level for certain
assertions because the auditor believes
A. Controls are unlikely to pertain to the assertions.
B. The entitys control components are interrelated.
C. Sufficient appropriate audit evidence to support the assertions is likely to be
available.
D. More emphasis on tests of controls than substantive tests is warranted.
53. Which of the following statements is correct concerning an auditors
assessment of control risk?
A. Assessing control risk may be performed concurrently during an audit with
obtaining an understanding of the entitys internal control.
B. Evidence about the operation of controls in prior audits may not be
considered during the current years assessment of control risk.
C. The basis for an auditors conclusions about the assessed level of control
risk need not be documented unless control risk is assessed at the
maximum level.
D. The lower the assessed level of control risk, the less assurance the evidence
must provide that the controls are operating effectively.
54. An auditor intends to perform tests of control on a clients cash disbursements
procedures. If the control procedures leave no audit trail of documentary
evidence, the auditor most likely will test the procedures by
A. Inquiry and analytical procedures.
B. Inquiry and observation.
C. Analytical procedures and confirmation.
D. Confirmation and observation.
55. When there are numerous property and equipment transactions during the
year, an auditor who plans to assess control risk at a low level usually performs
A. Tests of controls and extensive tests of property and equipment balances at
the end of the year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment
transactions.

D. Analytical procedures for property and equipment balances at the end of

the year.
56. Error includes
A. Engaging in complex transactions that are structured to misrepresent the
financial position or financial performance of the entity.
B. Concealing, or not disclosing, facts that could affect the amounts recorded
in the financial statements.
C. An incorrect accounting estimate arising from oversight or misinterpretation
of facts.
D. Intentional misapplication of accounting policies relating to amounts,
classification, manner of presentation, or disclosure.
57. Fraud involving one or more members of management or those charged with
governance is referred to as
A. Management fraud.
C. Fraudulent financial reporting.
B. Employee fraud.
D. Misappropriation of assets.
58. The primary responsibility for the prevention and detection of fraud rests with
A. Those charged with governance of the entity.
B. Management of the entity.
C. Both those charged with governance of the entity and management.
D. The auditor.
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59. Which of the following statements best describes an auditors responsibility
regarding misstatements?
A. An auditor should obtain reasonable assurance that the financial statements
taken as a whole are free from material misstatement, whether caused by
fraud or error.
B. An auditor should obtain absolute assurance that material misstatements in
the financial statements will be detected.
C. An auditor is responsible to detect material errors but has no responsibility
to detect material fraud that is concealed through employee collusion or
management override of internal control.
D. An auditors failure to detect a material misstatement resulting from fraud
is an indication of noncompliance with the requirements of the Philippine
Standards on Auditing (PSAs).
60. Because of the risk of material misstatement, an audit of financial statements
in accordance with PSAs should be planned and performed with an attitude of
A. Impartial conservatism.
B. Objective judgment.
C. Independent integrity.
D. Professional skepticism.
61. When the auditor identifies a misstatement in the financial statements, the
auditor should consider whether such a misstatement may be indicative of
fraud and if there is such an indication, the auditor should
A. Consider the implications of the misstatement in relation to other aspects of
the audit.
B. Withdraw from the engagement.
C. Communicate the information to regulatory and enforcement authorities.
D. Report the matter to the person or persons who made the audit
appointment.
62. The use of a computer changes the processing, storage, and communication of
financial information. A CIS environment may affect the following, except
A. The accounting and internal control systems of the entity.
B. The overall objective and scope of an audit.
C. The auditors design and performance of tests of control and substantive
procedures to satisfy the audit objectives.
D. The specific procedures to obtain knowledge of the entitys accounting and
internal control systems.
63. Which of the following statements concerning the Internet is incorrect?
A. The Internet is a shared public network that enables communication with
other entities and individuals around the world.

B. The Internet is a private network that only allows access to authorized

persons or entities.
C. The Internet is interoperable, which means that any computer connected to
the Internet can communicate with any other computer connected to the
Internet.
D. The Internet is a worldwide network that allows entities to engage in ecommerce/e-business activities.
64. The auditor shall consider the entitys CIS environment in designing audit
procedures to reduce risk to an acceptably low level. Which of the following
statements is incorrect?
A. The auditors specific audit objectives do not change whether financial
information is processed manually or by computer.
B. The methods of applying audit procedures to gather audit evidence are not
influenced by the methods of computer processing.
C. The auditor may use either manual audit procedures, computer-assisted
audit techniques (CAATs), or a combination of both to obtain sufficient
appropriate audit evidence.
D. In some CIS environments, it may be difficult or impossible for the auditor to
obtain certain data for inspection, inquiry, or confirmation without the aid of
a computer.

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10

65. A characteristic that distinguishes computer processing from manual

processing is
A. The potential for systematic error is ordinarily greater in manual processing
than in computerized processing.
B. Errors or fraud in computer processing will be detected soon after their
occurrences.
C. Most computer systems are designed so that transaction trails useful for
audit purposes do not exist.
D. Computer processing virtually eliminates the occurrence of computational
errors normally associated with manual processing.
66. Which of the following statements most likely represents a disadvantage for an
entity that maintains data files on personal computers (PCs) rather than
manually prepared files?
A. It is usually more difficult to compare recorded accountability with the
physical count of assets.
B. Random error associated with processing similar transactions in different
ways is usually greater.
C. Attention is focused on the accuracy of the programming process rather
than errors in individual transactions.
D. It is usually easier for unauthorized persons to access and alter the files.
67. An entity should plan the physical location of its computer facility. Which of the
following is the primary consideration for selecting a computer site?
A. It should be in the basement or on the ground floor.
B. It should maximize the visibility of the computer.
C. It should minimize the distance that data control personnel must travel to
deliver data and reports and be easily accessible by a majority of company
personnel.
D. It should provide security.
68. Which of the following is a false statement about audit objectives?
A. There should be a one-to-one relationship between audit objectives and
procedures.
B. Audit objectives should be developed in light of management assertions
about the financial statement components.
C. Selection of tests to meet audit objectives should depend upon the
understanding of internal control.

D. The auditor should resolve any substantial doubt

managements material financial statement assertions.

about

any

of

69. Which of the following statements concerning evidential matter is true?

A. Appropriate evidence supporting managements assertions should be
convincing rather than merely persuasive.
B. Effective internal control contributes little to the reliability of the evidence
created within the entity.
C. The cost of obtaining evidence is not an important consideration to an
auditor in deciding what evidence should be obtained.
D. A clients accounting records cannot be considered sufficient evidence to
support the financial statements.
70. Which of the following generalizations does not relate to the appropriateness of
evidence?
A. Audit evidence from external sources (for example, confirmation received
from a third party) is more reliable than that generated internally.
B. An auditors opinion, to be economically useful, is formed within reasonable
time and based on evidence obtained at a reasonable cost.
C. Audit evidence generated internally is more reliable when the related
accounting and internal control systems are effective.
D. Audit evidence obtained directly by the auditor is more reliable than that
obtained from the entity.
71. Each of the following might, by itself, form a valid basis for an auditor to decide
to omit a test except for the
A. Difficulty and expense involved in testing a particular item.
B. Assessment of control risk at a low level.
C. Inherent risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.

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11

72. Which of the following statements is correct concerning the use of negative
confirmation requests?
A. Unreturned negative confirmation requests rarely provide significant explicit
evidence.
B. Negative confirmation requests are effective when detection risk is low.
C. Unreturned negative confirmation requests indicate that alternative
procedures are necessary.
D. Negative confirmation requests are effective when understatements of
account balances are suspected.
73. Which of the following is not an audit procedure that the independent auditor
would perform with respect to litigation, claims, and assessments?
A. Inquire of and discuss with management the policies and procedures
adopted for litigation, claims, and assessments.
B. Obtain from management a description and evaluation of litigation, claims,
and assessments that existed at the balance sheet date.
C. Obtain assurance from management that if has disclosed all unasserted
claims that the lawyer has advised are probable of assertion and must be
disclosed.
D. Confirm directly with the clients lawyer that all claims have been recorded
in the financial statements.
74. Audit documentation may be recorded on paper or on electronic or other
media. The following are examples of audit documentation, except
A. Audit programs
B. Letters of confirmation and representation
C. Correspondence (including e-mail) concerning significant matters
D. The entitys accounting records
75. Audit sampling involves the
A. Selection of all items over a certain amount.
B. Application of audit procedures to less than 100% of items within a class of
transactions or an account balance such that all items have a chance of
selection.

C. Application of audit procedures to all items that comprise a class of

transactions or an account balance.
D. Application of audit procedures to all items over a certain amount and those
that are unusual or have a history of error.
76. An advantage of statistical over nonstatistical sampling methods in tests of
controls is that the statistical methods
A. Afford greater assurance than a nonstatistical sample of equal size.
B. Provide an objective basis for quantitatively evaluating sampling risks.
C. Can more easily convert the sample into a dual-purpose test useful for
substantive testing.
D. Eliminate the need to use judgment in determining appropriate sample
sizes.
77. Which of the following best illustrates the concept of sampling risk?
A. A randomly chosen sample may not be representative of the population as
a whole on the characteristic of interest.
B. An auditor may select audit procedures that are not appropriate to achieve
the specific objective.
C. An auditor may fail to recognize errors in the documents examined for the
chosen sample.
D. The documents related to the chosen sample may not be available for
inspection.
78. Analytical procedures used in the overall review stage of the audit generally
include
A. Retesting controls that appeared to be ineffective during the assessment of
control risk.
B. Considering unusual or unexpected account balances that were not
previously identified.
C. Gathering evidence concerning account balances that have not changed
from the prior year.
D. Performing tests of transactions to corroborate managements financial
statement assertions.

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12

79. Analytical procedures performed in the overall review stage of an audit suggest
that several accounts have unexpected relationships. The results of these
procedures most likely indicate that
A. The communication with the audit committee should be revised.
B. Irregularities exist among the relevant account balances.
C. Additional substantive tests of details are required.
D. Internal control activities are not operating effectively.
80. Which of the following procedures would an auditor most likely perform to
obtain evidence about the occurrence of subsequent events?
A. Inquiring as to whether any unusual adjustments were made after the date
of the financial statements.
B. Confirming a sample of material accounts receivable established after the
date of the financial statements.
C. Comparing the financial statements being reported on with those of the
prior period.
D. Investigating personnel changes in the accounting department occurring
after the date of the financial statements.
81. Which of the following statements best expresses the auditors responsibility
with respect to facts discovered after the date of the auditors report but
before the date the financial statements are issued?
A. The auditor should amend the financial statements.
B. If the facts discovered will materially affect the financial statements, the
auditor should issue a new report which contains either a qualified opinion
or an adverse opinion.
C. The auditor should consider whether the financial statements need
amendment, discuss the matter with management, and consider taking
actions appropriate in the circumstances.
D. The auditor should withdraw from the engagement.

82. Which of the following conditions or events most likely would cause an auditor
to have substantial doubt about an entitys ability to continue as a going
concern?
A. Cash flows from operating activities are negative.
B. Stock dividends replace annual cash dividends.
C. Significant related party transactions are pervasive.
D. Research and development projects are postponed.
83. Which of the following conditions or events most likely would cause an auditor
to have substantial doubt about an entitys ability to continue as a going
concern?
A. Restrictions on the disposal of principal assets are present.
B. Usual trade credit from suppliers is denied.
C. Significant related party transactions are pervasive.
D. Arrearages in principal stock dividends are paid.
84. When an auditor concludes that there is substantial doubt about a continuing
audit clients ability to continue as a going concern for a reasonable period of
time, the auditors responsibility is to
A. Consider the adequacy of disclosure about the clients possible inability to
continue as a going concern.
B. Issue a qualified or adverse opinion, depending upon materiality, due to the
possible effects on the financial statements.
C. Report to the clients audit committee that managements accounting
estimates may need to be adjusted.
D. Reissue the prior years auditors report and add an emphasis of matter
paragraph that specifically refers to substantial doubt and going
concern.
85. When an audit is made in accordance with generally accepted auditing
standards, the auditor should always
A. Observe the taking of physical inventory on the balance sheet date.
B. Obtain certain written representations from management.
C. Employ analytical procedures as substantive tests to obtain evidence about
specific assertions related to account balances.
D. Document the understanding of the clients internal control and the basis
for all conclusions about the assessed level of control risk for financial
statement assertions.

Page 13
86. When considering the use of managements written representations as audit
evidence about the completeness assertion, an auditor should understand that
such representations
A. Constitute sufficient appropriate audit evidence to support the assertion
when considered in combination with a sufficiently low assessed level of
control risk.
B. Are not part of the audit evidence considered to support the assertion.
C. Replace a low assessed level of control risk as audit evidence to support the
assertion.
D. Complement, but do not replace, substantive tests designed to support the
assertion.
87. A written representation from a clients management that, among other
matters, acknowledges responsibility for the fair presentation of financial
statements, should normally be signed by the
A. Chief financial officer and the chair of the board of directors.
B. Chief executive officer and the chief financial officer.
C. Chief executive officer, the chair of the board of directors, and the clients
lawyer.
D. Chair of the audit committee of the board of directors.
88. The date of the management representation letter should coincide with the
date of the
A. Statement of Financial Position
B. Latest related party transaction
C. Auditors report
D. Latest interim financial information

89. What type of opinion should be expressed if the clients management refuses
to provide a representation that the auditor considers necessary?
A. Qualified opinion or a disclaimer of opinion.
B. Qualified opinion or an adverse opinion.
C. Adverse opinion or a disclaimer of opinion.
D. Unqualified opinion.
90. The letter of audit inquiry should be
A. Prepared and sent by the auditor.
B. Prepared by management and sent by the auditor.
C. Prepared and sent by management.
D. Prepared by the auditor and sent by management.
91. The following statements relate to the date of the auditors report. Which is
false?
A. The auditor should date the report as of the completion date of the audit.
B. The date of the auditors report should not be earlier than the date on which
the financial statements are signed or approved by management.
C. The date of the auditors report should not be later than the date on which
the financial statements are signed or approved by management.
D. The date of the auditors report should always be later than the date of the
financial statements (i.e., the balance sheet date).
93. An auditor concludes that there is a material inconsistency in the other
information in an annual report to shareholders containing audited financial
statements. If the auditor concludes that the financial statements do not
require revision, but the client refuses to revise or eliminate the material
inconsistency, the auditor may
A. Disclaim an opinion on the financial statements after explaining the
material inconsistency in an emphasis of matter paragraph.
B. Revise the auditors report to include an other matter paragraph describing
the material inconsistency.
C. Express a qualified opinion after discussing the matter with the clients
directors.
D. Consider the matter closed because the other information is not in the
audited statements.
94. In which of the following situations would an auditor ordinarily choose between
expressing a qualified opinion or an adverse opinion?
A. The auditor wishes to emphasize an unusually important subsequent event.
B. The financial statements fail to disclose information that is required by
Philippine Financial Reporting Standards.
C. Events disclosed in the financial statements cause the auditor to have
substantial doubt about the entitys ability to continue as a going concern.
D. The auditor did not observe the entitys physical inventory and is unable to
become satisfied as to its balance by other auditing procedures.

Page 14
92. Which of the following terms is used in the standard to describe the effects on
the financial statements of misstatements or the possible effects on the
financial statements, if any, that are undetected due to an inability to obtain
sufficient appropriate audit evidence?
A. Persuasive
C. Material
B. Pervasive
D. Extensive
95. The following statements relate to unaudited prior year financial statements
that are presented in comparative form with audited current year financial
statements. Which is incorrect?
A. The incoming auditor should state in the auditors report that the
comparative financial statements are unaudited.
B. The incoming auditor need not perform audit procedures regarding opening
balances of the current period.
C. Clear disclosure in the financial statements that the comparative financial
statements are unaudited is encouraged.
D. In situations where the incoming auditor identifies that the prior year
unaudited figures are materially misstated, the auditor should request
management to revise the prior years figures or if management refuses to
do so, appropriately modify the report.

96. An accountants report on a review of the financial statements of an entity

should state that the accountant
A. Does not express an opinion or any form of limited assurance on the
financial statements.
B. Conducted the review in accordance with the Philippine Standard on Review
Engagements.
C. Obtained reasonable assurance about whether the financial statements are
free of material misstatements.
D. Examined evidence, on a test basis, supporting the amounts and
disclosures in the financial statements.
97. Financial statements of an entity that have been reviewed by an accountant
should be accompanied by a report stating that
A. The scope of the inquiry and analytical procedures performed by the
accountant has not been restricted.
B. The financial statements are the responsibility of the companys
management.
C. A review includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.
D. A review is greater in scope than a compilation, the objective of which is to
present financial statements that are free of material misstatements.
98. An accountant who reviews the financial statements of an entity should issue a
report stating that a review
A. Provides less assurance than an audit.
B. Provides negative assurance that internal control is functioning as designed.
C. Provides only limited assurance that the financial statements are fairly
presented.
D. Is substantially more in scope than a compilation.
99. When compiling an entitys financial statements, an accountant would be least
likely to
A. Perform analytical procedures designed to identify relationships that appear
to be unusual.
B. Read the compiled financial statements and consider whether they appear
to include adequate disclosure.
C. Obtain an acknowledgment from management of its responsibility for the
financial statements.
D. Plan the work so that an effective engagement will be performed.
100. A financial forecast consists of prospective financial statements that present an
entitys expected financial position, results of operations, and cash flows. A
forecast
A. Is based on the most conservative estimates.
B. Present estimates given one or more hypothetical assumptions.
C. Unlike a projection, may contain a range.
D. Is based on assumptions reflecting conditions expected to exist and courses
of action expected to be taken.
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