1.

A firm of CPAs may use policies and procedures such as notifying professional personnel as to
the name of audit clients having publicly held securities and conforming periodically with such
personnel that prohibited relations do not exist. This is done to achieve effective quality control
in which of the following areas?
a. Acceptance and continuance of clients
b. Human resources
c. Ethical Requirements
d. Leadership responsibilities for quality within the firm.

2. A CPA establishes quality control policies and procedures for deciding whether to accept a new
client or to continue to perform services for a current client. The primary purpose for
establishing such policies and procedures is to
a. Comply with financial reporting standards
b. Comply with the quality control standards established by the regulatory bodies
c. Comply with the standards of auditing
d. Minimize the likelihood of association with clients whose management lacks integrity

3. The objectives of the Philippine Accountancy Act of 2004 are the following, accept
a. Standardization and regulation of accounting education
b. Examination for registration of Certified Public Accountants
c. Supervision, control and regulation of the practice of accounting
d. Integration of accountancy profession

4. Under which of the following circumstances would the independence of a CPA be considered
impaired if the CPA, who is also an attorney, serves as auditor and provides legal services to the
same client?
a. When the CPA, as legal agent, consummates a business acquisition for the client.
b. When the CPA’s audit fees and legal fees are not billed separately.
c. When the CPA uses legal expertise to research a question of income tax law.
d. When the legal services consist of an analysis of the terms of a leases agreement.

5. Ronald, CPA performs accounting services for Tower Corporation. Tower wishes to offer its
shares to the public and asks Ronald to audit the financial statements prepared for registration
purposes. Ronald refers Tower to Harry, CPA, who is more competent in the area of registration
statement. Harry performs the audit of Tower’s financial statements and subsequently thanks
Ronald for the referral by giving Ronald a portion of the audit fee collected. Ronald accepts the
fee. Who, if anyone, has violated professional ethics?
a. Only Ronald
b. Both Ronald and Harry
c. Only Ronald
d. Neither Ronald nor Harry.
6. The main objective of operational auditing is
a. To evaluate the integrity of accounting information
b. To verify fulfillment of plans and sound business requirement
c. To measure and evaluate the effectiveness of controls
d. To produce results as desired or directed.

7. Which of the following statements is not correct?

a. Objectivity requires that internal auditors have an independent mental attitude.
b. Internal auditors should be independent of the activities they audit.
c. It is acceptable for internal auditors to recommend changes in operations and to install
and implement the operating systems, as long as they do not have the responsibility for
operating them throughout the year.
d. The internal auditor should not be responsible for correcting deficiencies when ineffective
or inefficient operations are found.

8. Which of the following actions should be avoided by a CPA?

a. A CPA in public practice agrees to be treasurer of a Lions Club
b. A CPA, officer of a bank, assists another CPA in practice to obtain a loan from said bank.
c. A CPA in the government service without BOA accreditation signs an audit report to
accompany a company’s income tax return.
d. A CPA teaching in a university accepts an audit engagement with an exporting firm.

9. In documenting the nature, timing and extent of audit procedures performed, the auditor shall
record the following except
a. The identifying characteristics of the specific items or matters tested.
b. Who performed the audit work as well as the date such as work was completed
c. Who reviewed the audit performed and the date and extent of such review
d. The time charges in performing the procedures as well as the corresponding audit revenue
generated.

10. A special purpose auditor’s report is issued in connection with the independent audit of the
following financial information except
a. Financial statements prepared in accordance with a comprehensive basis of accounting
b. Specified accounts, elements of accounts or items in a financial statement
c. Compliance with contractual agreements
d. Financial statements prepared in accordance with IFRS

11. Which of the following circumstances most likely would cause an auditor to believe that
material misstatements may exist in an entity’s financial statements?
a. Accounts receivable confirmation requests yield significantly fewer responses than
expected.
b. Audit trails of computer-generated transactions exist only for a short time
c. The chief financial officer does not sign the management representation letter until the last
day of the auditor’s field work.
d. Management consults with other accountants about significant accounting matters.
12. An investor is reading the financial statements of the Sunny Corporation and observes that the
statements are accompanied by an unqualified auditor’s report. From this the investor may
conclude that
a. Any disputes over significant accounting issues have been settled to the auditor’s
satisfaction
b. The auditor is satisfied that Sunny is operationally efficient.
c. The auditor has ascertained that Sunny’s financial statements have been prepared
accurately
d. Informative disclosures in the financial statements, but not necessarily in the footnotes, are
to be regarded as reasonably adequate.

13. In determining the type of opinion to express an auditor assesses the nature of the reporting
qualifications and the materiality of their effects. Materiality will be the primary factor
considered in the choice between
a. An “except for” opinion and adverse opinion
b. An “except for” opinion and a “ subject to” opinion
c. An adverse opinion and a disclaimer of opinion
d. A “subject to” opinion and a piecemeal opinion

14. Upon discovery of irregularities in the client’s tax return that the client refuses to correct, a CPA
withdraws from the engagement. How should the withdrawing CPA respond if asked by the
successor CPA why the relationship was terminated?
a. “It was a misunderstanding.”
b. “I suggest you get the client’s permission for us to discuss all matters freely.”
c. “I suggest you ask the client.”
d. “I found irregularities in the tax return which the client would not correct.”

15. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk from that originally planned. To achieve an overall audit risk level
that is substantially the same as the planned audit risk level, the auditor would
a. Increase inherent risk
b. Increase materially levels
c. Decrease substantive testing
d. Decrease detection risk

16. Which of the following factors or conditions is an auditor least likely to plan an audit to
discover?
a. Financial pressures affecting employees.
b. Higher turnover of senior management
c. Inadequate monitoring of significant controls
d. Inability to general positive cash flows from operations.

17. To obtain an understanding of a continuing client’s business in planning an audit, an auditor

most likely would
a. Performs tests of details of transactions and balances
b. Review prior year working papers and the permanent file for the client.
c. Read specialized industry journals
d. Reevaluate the client’s internal control environment.
18. At what stage in the audit are the analytical procedures performed?
a. In the planning stage
b. In conjunction with tests of transactions and tests of details of balances
c. Near the end
d. During all three stages

19. After performing a study and evaluation of the client’s system of internal control an auditor has
concluded that the system is well designed and is functioning as anticipated. Under these
circumstances the audit would most likely
a. Cease to perform further substantive tests
b. Not increase the extent of predetermined substantive tests
c. Increase the extent of anticipated analytical review procedures
d. Perform all compliance tests to the extent outlined in the preplanned audit program.

20. In planning an audit engagement, which of the following is a factor that affects the independent
auditor’s judgment as to quantity, type and content of working papers?
a. The estimated occurrence rate of attributes.
b. The preliminary evaluation based upon initial substantive testings.
c. The contents of the client’s representation letter.
d. The anticipated nature of the auditor’s report.

21. Wald, CPA, is preparing unaudited financial statements for Zaikin Company. During the
engagement, Wald becomes aware that the statements are misleading. Wald should
a. disclaim an opinion.
b. insist that the statements be corrected.
c. issue an adverse opinion.
d. insist that the statements be audited.

22. Which of the following is not considered among the benefits of audit planning?
a. Audit planning helps coordinate the work to be done by auditors of components and
other parties such as experts, specialists, etc.
b. Audit planning helps ensure that the audit is properly organized, managed and performed in
an effective and efficient manner.
c. Audit planning aids in ensuring the examination of financial statements can be performed
without problems and difficulties.
d. Audit planning helps ensure that appropriate attention is devoted to important areas of the
audit.

23. Which of the following is not considered by the auditor when establishing the scope of the audit
engagement?
a. The financial reporting framework on which the financial information to be audited has
been prepared.
b. Industry-specific reporting requirements.
c. Expected audit coverage including the number and locations of components to be included.
d. Expected nature and timing of communications among engagement team members
including the nature and timing of team meetings and timing of the review of the work
performed.
24. The auditor should plan the nature, timing and extent of direction and supervision of
engagement team members and review of their work. Which of the following factors need not
to be considered by the auditor in preparing this plan?
a. Size and complexity of the entity.
b. The reporting currency to be used, including any need for currency translation for the
financial information audited.
c. The capabilities and competence of personnel performing the audit work.
d. The risks of material misstatement.

25. Determining that receivables are presented at net-realizable value is most directly related to
which management assertion?
a. Existence or occurrence
b. Rights
c. Valuation or allocation
d. Presentation and disclosure.

26. Which of the following audit risk components may be assessed in non-quantitative terms?
Inherent risk Control risk Detection risk
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes

27. Analytical procedures

a. are required to be performed in the planning phase of the audit.
b. are often done during the examination’s testing phase.
c. are required to be dine during the completion phase of the audit.
d. may be performed at any of three times during the engagement.

28. Where an unusual fluctuation is indicated by analytical procedures and management is unable
to provide a satisfactory explanation, the auditor must assume that there is a high probability
that an error or irregularity exists. In this case, the auditor must
a. issue either a qualified or an adverse opinion.
b. issue a disclaimer.
c. issue either a qualified opinion or a disclaimer.
d. design other appropriate audit procedures to determine if such errors do exist.

29. Which of the following statements is correct concerning that auditor’s required communication
of internal control reportable conditions?
a. If the auditor does not become aware of any reportable conditions during the examination,
that fact must be communicated.
b. Reportable conditions reported at interim dates should be tested for correction before
completion of the engagement.
c. Although written communication is preferable, the auditor may orally communicate the
findings.
d. Reportable conditions reports at interim dates repeated in the communication at the
completion of the engagement.
30. Most audits of a company are done annually by the same CPA firm. Except for initial
engagements, the auditor begins the audit with a great deal of information about the client’s
internal control structure developed in prior years. Because systems and controls usually don’t
change frequently,
a. The auditor can skip the evaluation of this area on repeat engagements
b. This information can be updated and carried forward to the current year’s audit
c. It eases the burden on the auditor’s requirement to do a complete study of the control this
year.
d. It is sufficient for the auditor just to inquire of client whether the controls have been
changed since last year.

31. Which of the following statement is correct concerning and auditor’s communication of internal
control structure related matters (reportable conditions) noted in an audit?
a. The auditor may issue a written report to the audit committee representing that no
reportable conditions were noted during the audit.
b. Reportable conditions should be re-communicated each year even if the audit committee
has acknowledged its understanding of such deficiencies.
c. Reportable conditions may not be communicated in a document that contains suggestions
regarding activities that concern other topics such as business strategies or administrative
efficiencies.
d. The auditor may choose to communicate significant internal control structure related
matters either during the course of the audit or after the audit is concluded.

32. When obtaining an understanding of an entity’s control environment an auditor should

concentrate on the substance of management’s policies and procedures rather than their form
because
a. The auditor may believe that the policies and procedures are inappropriate for that
particular entity
b. The board of directors may not be aware of management’s attitude toward the control
environment
c. Management may establish appropriate policies and procedures but not act on them.
d. The policies and procedures may be so weak that no reliance is contemplated by the
auditor.

33. An auditor is least likely to test for the internal control that provides for
a. Segregation of the functions of recording disbursements and reconciling the bank account
b. Comparison of receiving reports and vendor’s invoices with purchase orders
c. Approval of the purchase and sale of marketable securities
d. Classification of revenue and expense transactions by product line.

34. Which of the following statements regarding auditor documentation of the client’s internal
control structure is correct?
a. Documentation must include flowchart
b. Documentation must include procedural write-ups
c. No documentation is necessary although it is desirable
d. No one particular form of documentation is necessary, and the extent of documentation
may vary.
35. Reportable conditions are matters that come to an auditor’s attention, which should be
communicated to an entity’s audit committee because they represent
a. Material irregularities or illegal acts perpetrated by high level management
b. Significant deficiencies in the design or operation of the internal control structure.
c. Flagrant violations of the entity’s documented conflict-of-interest policies
d. Intentional attempts by client personnel to limit the scope of the auditor’s field work.

36. Effective internal control requires an organization independence of departments. Organizational

independence would be impaired in which of the following situations?
a. The internal auditors report to the audit committee of the board of directors
b. The controller reports to the vice president of production
c. The payroll accounting department reports to the chief accountant
d. The cashier reports to the treasurer.

37. The auditor’s study and evaluation of internal control is done for each of the following reason
except
a. To provide a basis for constructive services suggestions
b. To aid in determination of the nature, timing, and extent of audit tests
c. To establish a basis for reliance thereon
d. To provide training and development for staff accountants

38. One important reason why a CPA, during the course of an audit engagement, prepares system
flowcharts is to
a. Reduce the need for inquiries of client personnel concerning the operations of the system of
internal accounting control.
b. Depict the organizational structure and document flow in a single chart for review and
reference purposes
c. Assemble the internal control findings into a comprehensive format suitable for analysis
d. Prepare documentation that would be useful in the event of future consulting engagement.

39. If the auditor were responsible for making certain that all the assertions of management in the
statements were correct
a. Bankruptcies could no longer occur
b. Bankruptcies would be reduced to a very small number
c. Audits would be much easier to complete
d. Audits would not be economically feasible

40. The factor that distinguishes an error from an irregularity is

a. Materiality
b. Intent
c. Whether it is a peso amount or process
d. Whether it is a caused by the auditor or the client.
41. In distinguishing between the detection of material management fraud and an equally material
error, audits
a. Should be expected to provide the same degree of assurance
b. Cannot be expected to provide the same degrees of assurance
c. Provide an assurance of detecting either
d. Should provide complete assurance of detection.

42. When planning the audit, if the auditor has no reason to believe that illegal acts exist, the
auditor should
a. Make inquiries of management regarding their policies and regarding their knowledge of
violations, and then rely on normal audit procedures to detect errors, irregularities, and
illegalities
b. Still include some audit procedures designed specifically to uncover illegalities
c. Ignore the topic
d. Include audit procedures which have a strong probability of detecting illegal acts.

43. When the auditor knows that an illegal act has occurred, the auditor must
a. Issue an adverse opinion
b. Withdraw from the engagement
c. Consider the effects on the financial statements, including the adequacy of disclosure
d. Report it to the proper governmental authorities

44. The most important general ledger account included in and affecting cycles is the
a. General cash account
b. Inventory account
c. Income tax expense and liability accounts
d. Retained earnings account

45. Management assertions are

a. Stated in the footnotes to the financial statements
b. Implied or expressed representations about the accounts in the financial statements
c. Explicitly expressed representations about the financial statements
d. Provided to the auditor in the Assertions Letter, but are not disclosed on the financial
statements.

46. Which of the following statements is not correct?

a. It would be violation of the completeness assertion if management would record a sale
that did not take place
b. The completeness assertion deals with matters opposite from those of the
existence/occurrence assertions
c. The completeness assertion is concerned with the possibility of omitting items from the
financial statements that should have been included.
d. The existence/occurrence assertion is concerned with inclusion of amount that should not
have been.
47. Which one of the following types of evidence does not aid in achieving the audit objective of
determining ownership?
a. Analytical procedures
b. Confirmations
c. Documentation
d. Inquiries of client

48. Which one of the following types of evidence will aid in achieving the audit objective of
determining mechanical accuracy?
a. Confirmation
b. Recomputation
c. Physical examination
d. Inquiries of client.

49. With respect to records in a CPA’s possession, rules of conduct provide that
a. Copies of client records incorporated into audit working papers must be returned to the
client upon request
b. Worksheets in lieu of general ledger belong to the auditor and need not be furnished to the
client upon request.
c. An extensive analysis of inventory prepared by the client at the auditor’s request is
working papers that belong to the auditor and need not be furnished to the client upon
request.
d. The auditor who returns copies of client records must return the original records upon
request.

50. The strongest criticism of the reliability of audit evidence that the auditor physically observes is
that
a. The client may conceal items from the auditor
b. The auditor may not be qualified to evaluate the items which he or she is observing
c. Such evidence is too costly in relation to its reliability
d. The observation must occur at specific time, which is often difficult to arrange.

51. The auditors determined that the entity is suffering financial difficulty and the going-concern
status is seriously doubt. Assuming the entity adequately disclosed this matter in the financial
statements the auditors must choose between which of the following auditor’s report
alternatives?
a. Unqualified opinion with a going-concern explanatory paragraph or disclaimer of opinion
b. Standard report or a disclaimer of opinion.
c. Qualified opinion or adverse opinion
d. Standard report or adverse opinion

52. Which of these situations would require auditors to append an explanatory paragraph about
consistency to an otherwise unqualified opinion?
a. Entity changed its estimated allowance for uncollectible accounts receivable
b. Entity corrected a prior mistake in accounting for interest capitalization
c. Entity sold one of its subsidiaries and consolidated six subsidiaries this year compared to
seven last year.
d. Entity changed its inventory costing method from FIFO to LIFO.
53. Drew became the new auditor for Shunflower Corporation, succeeding Mariel, who audited the
financial statements last year. Drew needs to report on Shunflower’s comparative financial
statements and should disclose in his report an explanation about other auditors having audited
the prior year
a. Only if Mariel’s opinion last year was qualified
b. Describing the prior audit and the opinion but not naming Mariel as the predecessor
auditor.
c. Describing the audit but not revealing the type of opinion Mariel gave.
d. Describing the audit and the opinion but not naming Mariel as the predecessor auditor.

54. A material departure from financial reporting standards will result in auditor consideration of
a. Whether to issue an adverse opinion rather than a disclaimer of opinion
b. Whether to issue a disclaimer of opinion rather than an “except for” opinion
c. Whether to issue an adverse opinion rather than an “except for” opinion
d. Nothing, because none of these opinions is applicable to this type of exception.

55. Three of the following conditions must be present if the auditor is to issue the standard
unqualified audit report. Which one of the following conditions need not be present to issue
such a report?
a. All statements- balance sheets=, income statement, statement of retained earnings, and
statement of cash flows- are included in the financial statements.
b. The PSAs have been followed in all respects on the engagement.
c. The financial statements are presented in accordance with the Philippine Standard on
Auditing.
d. Sufficient evidence has been accumulated and the auditor has conducted the engagement
in a manner that enables him/her to conclude that the PSAs have been followed.

56. When a misstatement with the highest level of materiality exists on the financial statements,
the auditor must issue
a. An adverse opinion
b. A disclaimer of opinion
c. Either a qualified opinion or an adverse opinion, depending on which conditions exist
d. Either an adverse opinion or a disclaimer of opinion, depending on which conditions exist.

57. 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
b. Pervasiveness
c. Financial analysis
d. Ratio analysis

58. The most common case in which conditions beyond the client’s and auditor’s control cause a
scope restriction is an engagement
a. Agreed upon after the client’s balance sheet date
b. Where client won’t allow auditor to confirm receivables for fear of offending his customers
c. Where auditors doesn’t have enough staff to audit all of client’s foreign subsidiaries
 d. Where client is going through bankruptcy.

59. Should a situation arises where all audit procedures considered necessary in the circumstances
were performed and the auditor would otherwise issue an unqualified report, and then it was
discovered that the auditor has not fulfilled the independence requirements specified by the
Code of Ethics, the audit report issued
a. May still be the unqualified opinion
b. Must be a disclaimer of opinion
c. May be either an unqualified or disclaimer of opinion
d. Must be an adverse opinion.

60. When the auditor concluded that there is substantial doubt about the entity’s ability to continue
as going concern, he/she should issue
a. An unqualified opinion with an explanatory paragraph provided that client has made
adequate disclosures in the statements.
b. A qualified opinion with an explanatory paragraph, regardless of the adequacy of disclosures
in the financial statements
c. An adverse opinion, regardless of the adequacy of disclosures in the financial statements
d. The standards unqualified report provided that client had made adequate disclosures in the
statements.

61. Unaudited financial statements for the prior year presented in comparative form with audited
financial statements for the current year should be clearly marked to indicate their status and
I. The report on the prior period should be reissued to accompany the current period report
II. The report on the current period should include as a separate paragraph a description of the
responsibility assumed for the prior period’s financial statement.

a. I only
b. II only
c. Both I and II
d. Either I and II

62. The group engagement team is satisfied with the independence and professional reputation of
the component auditor who has audited the financial statements of a subsidiary. To indicate the
division of responsibility, the principal auditor should modify
a. Only the opinion paragraph of the report
b. Only the opinion paragraph of the report and include an explanatory middle paragraph
c. Only the auditor’s responsibility paragraph of the report
d. Both the auditor’s responsibility and opinion paragraphs of the report.

63. In which of the following circumstances would an auditor be most likely to adverse opinion?
a. The statements are not in conformity with the PFRSC
b. Information comes to the auditor’s attention that raises substantial doubt about the entity’s
ability to continue in existence
c. The chief executive officer refuses the auditor access to minutes of board of directors’
meeting
d. Test of controls show that the entity’s internal control structure is so poor that it cannot be
relied upon.
64. During a review of the financial statements of a nonpublic entity, the CPA finds that the financial
statements contain a material departure from financial reporting standards. If management
refuses to correct the financial statement presentations, the CPA should
a. disclose the departure in a separate paragraph of the report.
b. issue an adverse opinion.
c. attach a note explaining the effects of the departure.
d. issue a compilation report.

65. When an accountant performs more than one level of service (for example, a compilation and a
review, or a compilation and an audit) concerning the financial statements of a nonpublic entity,
the accountant generally should issue the report that is appropriate for
a. the lowest level of service rendered.
b. the highest level of service rendered.
c. a compilation engagement.
d. a review engagement.

66. To perform an attestation engagement on prospective information or pro forma information,

accountants must do all of the following except
a. Obtain knowledge about the entity’s business and accounting principles.
b. Understand the internal controls used in the processes that generated the information.
c. Obtain an understanding of the process through which the information was developed.
d. Evaluate the assumptions used to prepare the information.

67. Kristin is surfing the Internet and finds a great pair of rollerblades at a really low price. She has
never heard of the company and is concerned that she may not receive the product she orders.
Kristin may be more willing to place an order with this company if
a. The web site displays the Web Trust Seal.
b. The company provides its annual report and the report of the independent auditors on its
Web site.
c. The company provides a money-back guarantee.
d. Only a partial payment is required prior to receiving the product.

68. Which of the following is the format of compilation that would not be acceptable?
a. A compilation with full disclosure in accordance with financial reporting standards.
b. A compilation that omits substantially all disclosures, the report indicates that they are
missing, and their absence is not an intent to mislead the users.
c. A compilation with a separate paragraph warning readers that the CPA is not responsible
for exercising due care when performing this type of engagement.
d. A compilation with a separate paragraph that admits that the CPA is not independent with
respect to this client.

69. In a review service where client has failed to follow financial reporting standards is acceptable is
for a
a. review without complete disclosure
b. review with complete disclosure
c. compilation without complete disclosure
d. compilation with complete disclosure.
70. 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. issue an “except for” qualified opinion after discussing the matter with the client’s board of
directors.
b. consider the matter closed since the other information is not in the audited financial
statements.
c. disclaim an opinion on the financial statements after explaining the material inconsistency in
a separate explanatory paragraph.
d. revise the auditor’s report to include a separate explanatory paragraph describing the
material inconsistency.

71. Although the quantity and content of audit working papers vary with each particular
engagement, an auditor’s permanent files most likely include
a. schedules that support the current year’s adjusting entries.
b. prior years’ accounts receivable confirmation that were classified as exceptions.
c. documentation indicating that the audit work was adequately planned and supervised.
d. analyses of capital stock and other owners’ equity accounts.

72. You have been assigned to the year-end audit of a financial institution and are planning the
timing of audit procedures relating to cash. You decide that it would be preferable to:
a. Count the cash in advance of the balance sheet date in order to disclose any kiting operation
at year-end.
b. Coordinate the count of cash with the cutoff of accounts payable.
c. Coordinate the count of cash with the count of marketable securities and other negotiable
assets.
d. Count the cash immediately upon the return of the confirmation letters from the financial
institution.

73. Which of the following is least likely to be considered an inherent risk relating to receivables and
revenues?
a. Restrictions placed on sales by laws and regulations.
b. Decline in sales due to economic declines.
c. Decline in sales due to product obsolescence.
d. Over-recorded sales due to a lack of control over the sales entry function.

74. Which of the following would most likely be detected by an auditor’s review of the client’s sales
cutoff?
a. Excessive goods returned for credit.
b. Unrecorded sales discounts.
c. Lapping of year-end accounts receivable.
d. Inflated sales for the year.
75. Skates, an independent auditor, was engaged to perform an examination of the financial
statements of Apex Incorporated one month after its fiscal year had ended. Although the
inventory count was not observed by Skates, and accounts receivable were not confirmed by
direct communication with creditors, Skates was able to gain satisfaction by applying alternative
auditing procedures. Skates’ auditor’s report will probably contain
a. an “except for” qualification.
b. an unqualified opinion and an explanatory middle paragraph.
c. either a qualified opinion or a disclaimer of opinion.
d. a standard unqualified opinion.

76. Which of the following is not a procedure which can be performed on canceled checks in an
effort to detect defalcations?
a. Compare the endorsements on checks with authorized signatures.
b. Scan endorsements for unusual or recurring second endorsements.
c. Examine voided checks to be sure they haven’t been used.
d. Examine the payroll records in subsequent periods to determine that terminated
employees are no longer being paid.

77. Which of the following is the best audit procedure for determining the existence of unrecorded
liabilities?
a. Examine confirmation requests returned by the creditors whose accounts appear on as
subsidiary trial balance of accounts payable.
b. Examine unusual relationships between monthly accounts payable balances and recorded
purchases.
c. Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain
whether they have been properly recorded.
d. Examine selected cash disbursements in the period subsequent to year-end.

78. Non-accounting data included in a long-form report have been subjected to auditing
procedures. The auditor’s report should state this fact and should explain that the non-
accounting data are presented for analysis purposes. In addition, the auditor’s report should
state whether the non-accounting data are
a. beyond the scope of the normal engagement and therefore, not covered by the opinion on
the financial statements.
b. within the framework of generally accepted auditing standards, which apply to the financial
statements, taken as a whole.
c. audited, unaudited, or reviewed on a limited basis.
d. fairly stated in all material respects in relation to the basic financial statements, taken as a
whole.
79. A CPA has been engaged to audit financial statements that were prepared on a cash basis. The
CPA
a. must ascertain that there is proper disclosure of the fact that the cash basis has been
used, the general nature of material items omitted, and the net effect of such omissions.
b. may not be associated with such statements which are not in accordance with financial
reporting standards.
c. must render a qualified report explaining the departure from financial reporting standards
in the opinion paragraph.
d. must restate the financial statements on an accrual and the render the standard (short-
form) report.

80. When making a review of interim financial information, the auditor’s work consists primarily of
a. studying and evaluating limited amounts of documentation supporting the interim financial
reporting information.
b. scanning and reviewing client-prepared, internal financial statements.
c. making inquiries and performing analytical procedures concerning significant accounting
matters.
d. confirming and verifying significant account balances at the interim date.

81. Which of the following is not a typical analytical review procedure?

a. Study of relationships of the financial information with relevant non-financial information.
b. Comparison of the financial information with similar information regarding the industry in
which the entity operates.
c. Comparison of recorded amounts of major disbursements with appropriate invoices.
d. Comparison of the financial information with budgeted amounts.

82. The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
a. Timing of inventory observation procedures to be performed.
b. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
c. Procedures to be undertaken to discover litigation, claims, and assessments.
d. Pending legal matters to be included in the inquiry of the client’s attorney.

83. Evidential matter concerning proper segregation of duties ordinarily is best obtained by
a. inspection of third-party documents containing the initials of who applied control
procedures.
b. direct personal observation of the employee who applies control procedures.
c. preparation of a flowchart of duties performed and available personnel.
d. making inquiries of co-workers about the employee who applies control procedures.

84. Of the following statements about an internal control system, which one is not valid?
a. No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
b. Transactions must be properly authorized before such transactions are processed.
c. Because of the cost benefit relationship, a client may apply control procedures on a test
basis.
d. Control procedures reasonably insure that collusion among employees cannot occur.
85. Which of the following control procedures most likely would assist in reducing control risk
related to the existence or occurrence of manufacturing transactions?
a. Perpetual inventory records are independently compared with goods on hand.
b. Forms used for direct material requisitions are pre-numbered and accounted for.
c. Finished goods are stored in locked limited-access warehouses.
d. Subsidiary ledgers are periodically reconciled with inventory control accounts.

86. Where the auditor has assessed control risk of a particular area at a reduced level, he or she will
then
a. eliminate the need to gather evidence in that area.
b. test the effectiveness of the controls in that area.
c. proceed to expand the sample sizes in that area.
d. negotiate with management to determine which controls will be tested in that area.

87. Tests of details and balances are specific procedures intended to

a. identify the details on the internal control system.
b. prove that the accounts with material balances are classified correctly.
c. test for monetary errors in the financial statements.
d. prove that the trial balance is in balance.

88. An auditor should recognize that the application of auditing procedures may produce evidential
matter indicating the possibility of errors or irregularities and therefore should
a. design audit test to detect unrecorded transactions.
b. extend the work to audit most recorded transactions and records of an entity.
c. plan and perform the engagement with an attitude of professional skepticism.
d. not depend on internal accounting control features that are designed to prevent or detect
errors or irregularities.

89. Under which of the following conditions can a disclaimer of opinion never be issued?
a. Going-concerns problems are highly material and significant.
b. The entity does not allow the auditors to have access to evidence about important accounts.
c. The auditors own stock in the entity.
d. The auditors have determined that the entity uses the NIFO (next-in, first out) inventory
costing method.

90. When a publicly-held company refuses to include in its audited financial statements any of the
segment information that the auditors believes is required, the auditor should issue a(an)
a. unqualified opinion with a separate explanatory paragraph emphasizing the matter.
b. “except for” qualified opinion because of inadequate disclosure.
c. adverse opinion because of the lack of conformity with financial reporting standards.
d. disclaimer of opinion because of the significant scope limitation.
91. When reporting on comparative financial statements where the financial statements of the prior
period have been examined by a predecessor auditor whose report is not presented, the
successor auditor should indicate in the report
a. the reasons why the predecessor auditor’s report is not presented.
b. the identity of the predecessor auditor who examined the financial statements of the prior
year.
c. whether the predecessor auditor’s review of the current year’s financial statements
revealed any matter that might have a material effect on the successor auditor’s opinion.
d. the type of opinion expressed by the predecessor auditor.

92. Unaudited financial statement for the prior year presented in comparative form with audited
financial statements for the current year should be clearly marked to indicate their status and
I The report in the prior period should be reissued to accompany the current period
report.
II The report on the current period should include as a separate paragraph a description of
the responsibility assumed for the prior period’s financial statements.

a. I only.
b. II only.
c. Both I and II.
d. Either I or II.

93. The predecessor auditor, who is satisfied after properly communicating with the successor
auditor, has reissued a report because the audit client desires comparative financial statements.
The predecessor auditor’s report should make
a. Reference to the report of the successor auditor only in the scope paragraphs.
b. Reference to the work of the successor auditor in the scope and opinion paragraphs.
c. Reference to both the work and the report of the successor auditor only in the opinion
paragraph.
d. No reference to the report of the work of the successor auditor.

94. Rachel, CPA is aware that Rachel’s name is to be included in the interim report of National
Company, a publicly-held entity. National’s quarterly financial statements are contained in the
interim report. Rachel has not audited or reviewed these interim financial statements. Rachel
should request that
I. Rachel’s name not be included in the communication.
II. The financial statements be marked as unaudited with notation that no opinion is expressed
on them.

a. I only
b. II only
c. Both I and II
d. Either I and II
95. Which of the following statements should not be included in an accountant’s standard report
based on the compilation of an entity’s financial statements?
A. A statement that the compilation was performed in accordance with standards established
by the Philippines Institutes of CPAs.
B. A statement that the accountant has not audited or reviewed the financial statements
C. A statement that the accountant does not express an opinion but expresses only limited
assurance on the financial statements.
D. A statement that a compilation is limited to presenting in the form of financial statements,
information that is the representation of management.

96. When an accountant examines a financial forecast that fails to disclose several significant
assumptions used to prepare the forecast, the accountant should describe the assumptions in
the accountant’s report and issue a (n)
a. Qualified opinion
b. Unqualified opinion with a separate explanatory paragraph
c. Disclaimer of opinion
d. Adverse opinion

97. When an accountant performs more than one level of service (for example, a compilation and a
review, or a compilation and an audit) concerning the financial statements of a nonpublic entity,
the accountant generally should issue the report that is appropriate for
a. The lowest level of service rendered
b. The highest level of service rendered
c. A compilation engagement
d. A review engagement

98. Which one of the following statements is true? In deciding on substantive test of transactions,
a. Some procedures are commonly employed on every audit regardless of the circumstances.
b. All procedures are dependent on the adequacy of the controls and the results of the test of
controls.
c. Results obtained in the prior year’s audit will not affect the procedures used this year.
d. The materiality of the item will not influence the choice of procedures used.

99. The cashier diverted cash received over the counter from a customer to his own use and wrote
off the receivable s bad debt. Select the control that should have prevented the error.
a. Aging schedules of accounts receivable are prepared periodically and reviewed by a
responsible official
b. Journal entries are approved by a responsible official.
c. Receipts are given directly to the cashier by the person who opens the mail.
d. Remittance advises, letters or envelopes that accompany receipts are separated and given
directly to the accounting department.

100. The most important objective for depreciation expense is proper

a. Valuation
b. Classification
c. Cutoff
d. Disclosure