Enhancing Students’ Understanding of the Auditing Standards

TOPIC 1 – OVERVIEW OF AUDIT & PRE-ENGAGEMENT ACTIVITIES

Overview of Auditing

1. Which is the primary objective of the independent auditor in auditing the

financial statements?
(a) To express an opinion on the financial viability of the client.
(b) To express a conclusion as to the accuracy of balances of client GL
accounts.
(c) To express an opinion on the fairness of the financial statements.
(d) To satisfy governmental requirements.

2. This is an examination of part of an organization’s

procedures and methods for the purpose of evaluating
efficiency and effectiveness of doing business is what type of
audit?
(a) Operational audit.

(b) Compliance audit.

(c) Financial statement audit.

(d) Forensic audit.

3. This is an audit that is intended to determine whether an

entity is following specific procedures or rules set down by
some higher authority is classified as a(n):
(a) Audit of financial statements.

(b) Compliance audit.

(c) Operational audit.

(d) Legal audit.

4. In auditing financial accounting data, the primary concern is with:
(a) Determining whether recorded information properly reflects the
economic events that occurred during the accounting period.
(b) Determining if fraud has occurred.
(c) Determining if taxable income has been calculated correctly.
(d) Analyzing the financial information to be sure that it complies with
government requirements.
5. Which one of the following is more difficult to evaluate objectively?
(a) Presentation of financial statements in accordance with generally
accepted accounting principles.
(b) Compliance with government regulations.
(c) Efficiency and effectiveness of operations.
(d) All three of the above are equally difficult.
6. By providing high level of assurance on the financial statements, the
independent audit
(a) Guarantees the fair presentation of the financial statements
(b) Directly enhances the strategic decision-making of client management
(c) Lends credibility to the financial statements
(d) Assures that tax collections of the government will be sufficient to
permit fiscal adequacy

7. The independent audit of the financial statements cannot provide

absolute assurance. This is because of the inherent limitations of the audit.
Which is not one of the inherent limitations of an audit?
(a) Use of selecting testing
(b) Nature of audit evidence which is persuasive rather than conclusive
(c) Inherent limitations of the client’s accounting and internal control
systems
(d) Inability to perform the audit using risk-based approach

8. Which of the following statements does not properly describe a limitation

of an audit?
(a) Human factor does affect the auditor’s performance of audit procedures.
(b) The selection and performance of audit procedures necessary involves
the use of professional judgment of the auditor.
(c) Many financial statement assertions are not auditable.
(d) The auditor uses sampling in the performance of the audit.

9. The auditor uses professional judgment in making decisions about

Materiality Conclusions to be Evaluating

and audit risk drawn on audit
sufficiency
evidence gathered of evidence
 (a) Yes No Yes
(b) No Yes Yes
(c) Yes Yes Yes
(d) Yes Yes No

10. A government audit may extend beyond the audit leading to the
expression of an opinion on the fairness of financial statement presentation
to include

Program Results ComplianceEconomy and

Efficiency
(a) Yes Yes No
(b) Yes Yes Yes
(c) No Yes Yes
(d) No No Yes

11. The primary orientation of operational auditing is geared towards

(a) The reliability of accounting reports on operations.
(b) The detection and prosecution of fraudulent acts.
(c) Future improvements to accomplish the goals of management.
(d) The accuracy of financial information presented in reports.

12. In performing financial statement audits, which of the following would

an auditor least likely consider?
(a) Fairness of financial statement balances
(b) Internal control
(c) Quality of management’s decisions
(d) Compliance with PFRS
13. Broadly defined, the subject matter of any audit consists of
(a) Financial statements
(b) PFRS
(c) Financial information
(d) Assertions

14. Which assertion is violated when the client under-calculated allowance

for credit losses on receivables?
(a) Completeness
(b) Existence
(c) Accuracy
(d) Valuation

15. Which assertion is most likely violated when the client recorded a sale
of January 2020 in December 2019?
(a) Existence
(b) Valuation
(c) Presentation
(d) Cut-off

16. Which assertion is violated when the client did not reflect all cash in
bank accounts in the balance sheet?
(a) Completeness
(b) Existence
(c) Occurrence
(d) Rights and obligations
17. Which assertion is violated when there numerous purchases but were
not recorded by the client?
(a) Completeness
(b) Existence
(c) Occurrence
(d) Rights and obligations

18. The client did not mention in the notes information about loan covenant
stipulations on its notes payable.
(a) Completeness
(b) Existence
(c) Presentation and disclosure
(d) Rights and obligations

19. Before accepting an audit engagement, the independent auditor is

required to obtain
(a) A management representation letter from the prospective client
(b) A detailed understanding of client’s business, operations and processes
(c) An understanding of the significant movements in client accounts
(d) A preliminary understanding of the prospective client’s business and
industry

20. Which of the following factors most likely would cause a CPA to not
accept a new audit engagement?
(a) The prospective client has fired its prior auditor.
(b) The CPA lacks a thorough understanding of the prospective client's
operations and industry.
(c) The CPA is unable to review the predecessor auditor's working papers.
(d) The prospective client is unwilling to make financial records available to
the CPA.

21. Which of the following factors would most likely cause a CPA to decide
not to accept a new audit engagement?
(a) Lack of understanding of the potential client's internal auditors'
computer-assisted audit techniques.
(b) Management's disregard for internal control.
(c) The existence of related party transactions.
(d) Management's attempt to meet earnings per share growth rate goals.

TOPIC 2 - AUDIT PLANNING

1. The risk that the auditor may unknowingly fail to appropriately modify
his or her opinion on financial statements that are materially
misstated is:
a. analytical procedures risk.
 b. control risk.
c. audit risk.
d. inherent risk.

2. The susceptibility of an account or transaction class to material

misstatement in the absence of internal control is called:
a. Account risk c. Detection risk
b. Control risk d. Inherent risk

3. The risk that the auditor’s procedures will not detect a material
misstatement that exists in an assertion is:
a. control risk.
b. audit risk.
c. inherent risk.
d. detection risk.

4. Which of the following best describes control risk?

a. The risk that a material misstatement will occur in the
accounting process.
b. The risk that controls will not detect a material misstatement
that occurs.
c. The risk that audit procedures will fail to detect a weak control
system.
d. The risk that the prescribed control procedures will not be
applied uniformly.

5. The auditor faces a risk that the examination will not detect material
misstatements in the financial statements. In regard to minimizing
this risk, the auditor primarily relies on:
a. Substantive test c. Internal control
b. Test of controls d. Statistical analysis

6. Risk in auditing means that the auditor accepts some level of

uncertainty in performing the audit function. An effective auditor will
a. Take any means available to reduce the risk to the lowest possible
level.
b. Set the risk level between 5% and 10%.
c. Perform the audit procedures first and quantitatively set the risk
level before forming an opinion and writing the report.
d. Recognize that risk exists and deal with them in an appropriate
manner.

7. Which of the following audit risk components may be assessed in

quantitative and non-quantitative terms?
Contr Detecti Inhere Contr Detecti Inheren
ol on risk nt risk ol on risk t risk
 risk risk
a Yes Yes No c Yes Yes Yes
. Yes No Yes . No Yes Yes
b d
. .

8. Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor’s discretion.

9. As the acceptable level of detection risk decreases, an auditor may

a. Increase substantive test
b. Decrease substantive test
c. Increase tests of controls
d. Decrease tests of controls

10. As the acceptable level of detection risk decreases, an auditor may

a. Reduce substantive testing by relying on the assessments of
inherent risk and control risk.
b. Postpone the planned timing of substantive tests from interim
dates to the year-end.
c. Eliminate the assessed level of inherent risk from consideration
as a planning factor.
d. Lower the assessed level of control risk from the maximum level
to below the maximum.

11. An auditor may compensate for a weakness in the internal control by

increasing the
a. Level of detection risk.
b. Preliminary judgment about audit risk.
c. Extent of tests of controls (compliance tests).
d. Extent of test of details

12. What is the magnitude of audit risk if inherent risk is .50, control risk
.40, and detection risk .10?
a. .20 b. .10 c. .04 d. .
02

13. Some account balances, such as those for pensions or leases, are the
results of complex calculations. The susceptibility to material
misstatements in these types of accounts is defined as
a. Audit risk b. Detection risk c. Sampling risk d. Inherent risk
14. Inherent risk is defined as the susceptibility of an account balance or
class of transactions to error that could be material assuming that there
were no related internal controls. Of the following conditions which one
does not increase inherent risk?
a. The client has entered numerous related party transactions during the
year under audit
b. Internal control over shipping, billing, and recording of sales revenue
is weak
c. The client has lost a major customer accounting for approximately
30% of annual revenue
d. The board of directors approved a substantial bonus for the president
and chief executive office and also approved an attractive stock option
plan for themselves.

15. If it is probable that the judgment of a reasonable person would have

been changed or influenced by the omission or misstatement of
information, then that information is:
a. significant. b. insignificant. c. material. d. relevant.

16. Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are
important for fair presentation of financial statements in conformity
with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the
largest aggregate level of misstatements that could be materiality any
one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances
and necessarily involve both quantitative and qualitative judgments.
d. An auditor’s consideration of materiality is influenced by the auditor’s
perception of the needs of a reasonable person who will rely on the
financial statements.

17. In developing the preliminary level of materiality in an audit, the

auditor will
a. Look to audit standards for specific materiality guidelines
b. Increase the level of materiality if fraud is suspected
c. Rely primarily on professional judgment to determine the materiality
level
d. Use the same materiality level as that used for different clients in the
same industry

18. In setting materiality guidelines, the ASC and the PICPA provide the
following guidelines to practitioners:
a. Both agree that materiality should be set at an amount not greater than 10%
of Net income
 b. ASC’s guideline is greater than 10% but the PICPA’s is greater than 5%.
c. Both agree that it should be greater than 5%.
d. No specific materiality guidelines are provided by either of them.

19. In considering materiality for planning purposes, an auditor believes

that misstatements aggregating P100,000 would have a material effect
on an entity’s income statement, but that misstatements would have to
aggregate P200,000 to materially affect the balance sheet. Ordinarily, it
would be appropriate to design auditing procedures that would be
expected to detect misstatements that aggregate
a. P100,000 b. P150,000 c. P200,000 d. P300,000

20. “Tolerable misstatement” is the term used to indicate materiality at

the:
a. balance sheet level. d. company-wide level.
b. account balance level. e. transactions level.
c. income statement level.

21. An assumption underlying analytical procedures is that

a. These procedures cannot replace tests of balances and
transactions.
b. Statistical tests of financial information may lead to the discovery
of material errors in the financial statements.
c. The study of financial ratios is an acceptable alternative to the
investigation of unusual fluctuations.
d. Relationships among data may reasonably be expected to exist and
continue in the absence of known conditions to the contrary.

22. Analytical review procedures are

a. substantive tests designed to evaluate the client’s system of internal
control
b. compliance tests designed to evaluate the validity of management
assertions
c. substantive tests designed to evaluate the reasonableness of the
client’s financial information
d. Compliance tests designed to evaluate the reasonableness of the
client’s financial information

23. Auditors apply analytical procedures to the client's operations in order

to identify
a. Improper separation of accounting and other financial duties.
a. Weaknesses of a material nature in the client's internal control.
b. Unusual transactions.
c. Noncompliance with prescribed control procedures.
24. For all audits of financial statements made in accordance with PSA, the
use of analytical procedures is required to some extent
In the planning stage As a substantive test In the review stage
a. Yes No Yes
b. No Yes No
c. No Yes Yes
d. Yes No No

25. As a result of analytical procedures, the independent auditor

determines that the gross profit percentage has declined form 30% in
the preceding year to 20% in the current year. the auditor should
a. Document management’s intentions with respect to plans for
reversing this trend
b. Evaluate management’s performance in causing this decline
c. Require footnote disclosure
d. Consider the possibility of a misstatement in the financial
statements.

26. 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. I.C. activities are not operating effectively
a. Additional tests of details are required
b. Irregularities exist among the relevant account balances
c. Communication with the audit committee should be revised

27. Auditors sometimes use comparison of ratios as audit evidence. For

example, an unexplained decrease in the ratio of gross profit to sales
may suggest which of the following possibilities?
a. Unrecorded purchases
a. Unrecorded sales
b. Merchandise purchases being charged to selling and general
expense
c. Fictitious sales

28. Which result of an analytical procedure suggests the existence of

obsolete merchandise?
a. Decrease in the inventory turnover rate
a. Decrease in the ratio of gross profit to sales
b. Decrease in the ratio of inventory to accounts payable
c. Decrease in the ratio of inventory to accounts receivable
 Topic 3 - AUDIT EVIDENCE

1. A cash shortage may be concealed by transporting funds from one

location to another or by converting negotiable assets to cash. Because of
this, which of the following is vital?
A. Simultaneous confirmations.
B. Simultaneous bank reconciliations.
C. Simultaneous verification.
D. Simultaneous surprise cash count.

2. Confirmation is most likely to be a relevant form of evidence with regard

to assertions about accounts receivable when the auditor has concerns
about the receivables’
A. Valuation.
B. Classification.
C. Existence.
D. Completeness.

3. Tracing recorded sales transactions in the sales journal to the shipping

documents (bills of lading) provides evidence about the:
A. Completeness of recording of sales transactions.
B. Occurrence of sales transactions.
C. Billing of all sales transactions.
D. Presentation of payables.

4. The auditors' count of the client's cash should be coordinated to coincide

with the:
A. Consideration of the internal controls with respect to cash.
B. Close of business on the balance sheet date.
C. Count of investment securities.
D. Count of inventories.

5. What type of error is the CPA most likely to discover when he/she
examines all shipping reports dated in January of 20X1, shipped FOB
shipping point, which were recorded in December of 20X0 as credit sales?
A. Accounts receivable are overstated at December 31, 20X0.
B. Accounts receivable are understated at December 31, 20X0.
C. Operating expenses are overstated for the 12 months ended December
31, 20X0.
D. Sales returns and allowance are overstated at December 31, 20X0.

6. In which of the following circumstances would the use of the negative

form of accounts receivable confirmation most likely be justified?
A. A substantial number of accounts may be in dispute and the accounts
receivable balance arises from sales to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts
receivable balance arises from sales to many customers with small
balances.
C. A small number of accounts may be in dispute and the accounts
receivable balance arises from sales to a few major customers.
D. A small number of accounts may be in dispute and the accounts
receivable balance arises from sales to many customers with small
balances.

7. An auditor has accounted for a sequence of inventory tags and is now

going to trace information on a representative number of tags to the
inventory summary sheets. Which assertion does this procedure relate to
most directly?
A. Completeness.
B. Existence.
C. Legality.
D. Valuation.

8. If the auditor is unable to attend physical inventory counting due to

unforeseen circumstances, the auditor

A. shall make or observe some physical counts on an alternative date,

without performing audit procedures on intervening transactions if control
risk is low.

B. shall make or observe some physical counts on an alternative date if

control risk is low, and perform audit procedures on intervening
transactions.

C. both a and b

D. shall automatically modify the audit opinion due to scope limitation.

9. An auditor most likely would make inquiries of production and sales

personnel concerning possible obsolete or slow-moving inventory to support
management’s financial statement assertion of
A. Valuation.
B. Rights.
C. Existence.
D. Presentation.

10. Which of the following procedures would an auditor most likely perform
in searching for unrecorded liabilities?
A. Trace a sample of accounts payable entries recorded just before year-end
to the unmatched receiving report file.
B. Compare a sample of purchase orders issued just after year-end with the
year-end accounts payable trial balance.
C. Vouch a sample of cash disbursements recorded just after year-end to
receiving reports and vendor invoices.
D. Scan the cash disbursements entries recorded just before year-end for
indications of unusual transactions.

11. Auditor confirmation of accounts payable balances at the balance sheet

date may be unnecessary because
A. This is a duplication of cutoff tests.
B. Accounts payable balances at the balance sheet date may not be paid
before the audit is completed.
C. Correspondence with the audit client’s attorney will reveal all legal
action by vendors for nonpayment.
D. There is likely to be other reliable external evidence to support the
balances.

12. In auditing accounts payable, an auditor’s procedures most likely would

focus primarily on management’s assertion of
A. Existence.
B. Presentation and disclosure.
C. Completeness.
D. Valuation.

13. Which of the following best describes the auditors' approach to the
audit of accrued liabilities?
A. Test computations.
B. Confirmation.
C. Observation.
D. A low planned assessed level of control risk.

14. In testing for unrecorded retirements of equipment, an auditor might.

A. Select items of equipment from the accounting records and then attempt
to locate them during the plant tour.
B. Compare depreciation expense with the prior year's depreciation
expense.
C. Trace equipment items observed during the plant tour to the equipment
subsidiary ledger.
D. Scan the general journal for unusual equipment retirements.

15. A plant manager would be most likely to provide information on which

of the following?
A. Adequacy of the provision for uncollectible accounts.
B. Appropriateness of physical inventory valuation techniques.
C. Existence of obsolete inventory.
D. Deferral of certain purchases of office supplies.

16. Which of the following best describes the auditors' approach to the
audit of the ending balance of property, plant and equipment for a
continuing nonpublic client?
A. Direct audit of the ending balance.
B. Agreement of the beginning balance to prior year's working papers and
audit of significant changes in the accounts.
C. Audit of changes in the accounts since inception of the company.
D. Audit of selected purchases and retirements for the last few years.

17. Which of the following is used to obtain evidence that the client's
equipment accounts are not understated?
A. Analyzing repairs and maintenance expense accounts.
B. Vouching purchases of plant and equipment.
C. Recomputing depreciation expense.
D. Analyzing the miscellaneous revenue account.

18. Which of the following is a customary audit procedure for the

verification of the legal ownership of real property?
A. Examination of correspondence with the corporate counsel concerning
acquisition matters.
B. Examination of ownership documents registered and on file at a public
hall of records.
C. Examination of corporate minutes and resolutions concerning the
approval to acquire property, plant and equipment.
D. Examination of deeds and title guaranty policies on hand.

19. An auditor analyzes repairs and maintenance accounts primarily to

obtain evidence in support of the audit assertion that all
A. Noncapitalizable expenditures for repairs and maintenance have been
recorded in the proper period.
B. Expenditures for property and equipment have been recorded in the
proper period.
C. Noncapitalizable expenditures for repairs and maintenance have been
properly charged to expense.
D. Expenditures for property and equipment have not been charged to
expense.
20. The most likely technique for the current year audit of goodwill which
was acquired three years ago by a continuing audit client:
A. Confirmation.
B. Observation.
C. Recomputation.
D. Inquiry.

21. In establishing the existence and ownership of a long-term investment

in the form of publicly traded stock, an auditor should inspect the securities
or
A. Correspond with the investee company to verify the number of shares
owned.
B. Inspect the audited financial statements of the investee company.
C. Confirm the number of shares owned that are held by an independent
custodian.
D. Determine that the investment is carried at the lower of cost or market.

22. When an auditor is unable to inspect and count a client’s investment

securities until after the balance sheet date, the bank where the securities
are held in a safe-deposit box should be asked to
A. Verify any differences between the contents of the box and the balances
in the client’s subsidiary ledger.
B. Provide a list of securities added and removed from the box between the
balance sheet date and the security-count date.
C. Confirm that there has been no access to the box between the balance
sheet date and the security-count date.
D. Count the securities in the box so the auditor will have an independent
direct verification.

23. An entity leased an asset and appropriately used PFRS 16. The auditor
should determine
A. whether the sum of the minimum lease payments equals the fair value
of the property
B. that the cost recorded by the entity is the cost of the property to the
lessor
C. that the discount rate used in calculating the present value of the
lease payments is the entity’s weighted average cost of capital
D. whether the interest rate used in computing the present value of the
minimum lease payments is the interest rate implicit in the lease.

24. An entity leased an asset and appropriately used PPFRS 16. What is the
first step of the auditor?
 A. Determine whether the sum of the minimum lease payments equals
the fair value of the property
B. Determine the present value of the minimum lease payments
C. Determine whether the entity used the appropriate discount rate
D. Determine whether the contract is a lease or contains a lease

25. When a CPA observes that the recorded interest expense seems to be
excessive in relation to the balance in the bonds payable account, the CPA
might suspect that
A. Discount on bonds payable is understated.
B. Bonds payable are understated.
C. Bonds payable are overstated.
D. Premium on bonds payable is overstated.

26. In auditing long-term bonds payable, an auditor most likely would

A. Perform analytical procedures on the bond premium and discount
accounts.
B. Examine documentation of assets purchased with bond proceeds for
liens.
C. Compare interest expense with the bond payable amount for
reasonableness.
D. Confirm the existence of individual bond holders at year-end.

27. Which of the following most likely would approve the issuance of notes
payable?
A. Controller.
B. Payroll.
C. Personnel.
D. Treasurer.

28. A bond trust indenture is the contractual agreement between the

bondholders and issuing company. In an audit of bonds payable, an auditor
expects the trust indenture to include
A. Effective yield of the bonds issued
B. Issuing company’s debt-to-equity ratio at the time of issuance
C. Forecasted debt-to-equity ratio of the issuing company
D. Interest rate and interest payment dates

29. An auditor usually obtains evidence of stockholders’ equity transactions

by reviewing the entity’s
A. Minutes of board of directors meetings.
B. Transfer agent’s records.
C. Canceled stock certificates.
D. Treasury stock certificate book.

30. In the audit of a small and medium-sized entity, which one of the
following areas can be expected to require the least amount of audit time?
A. Liabilities
B. Equity
C. Assets
D. Revenue

31. When a client company does not maintain its own stock records, the
auditor should obtain written confirmation from the transfer agent and
registrar concerning
A. Restrictions on the payment of dividends.
B. The number of shares issued and outstanding.
C. Guarantees of preferred stock liquidation value.
D. The number of shares subject to agreements to repurchase.

32. Which of the following is an auditor most likely to confirm from the
transfer agent and registrar?
A. Total shares of stock issued.
B. Restrictions on the payment of dividends.
C. Total market value of outstanding shares of stock.
D. Gains from sale of treasury stock.

33. When auditing related party transactions, the auditor places primary
emphasis on
A. determining the accuracy and classification of the related party
transactions
B. testing the existence of the related parties
C. proper accounting for, and disclosure of, the related party
transactions
D. eliminating the effects of related party transactions

34. 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.
35. After determining that a related-party transaction has, in fact, occurred,
an auditor should
A. Add a separate paragraph to the auditor’s standard report to explain
the transaction.
B. Perform analytical procedures to verify whether similar transactions
occurred, but were not recorded.
C. Obtain an understanding of the business purpose of the transaction.
D. Substantiate that the transaction was consummated on terms
equivalent to an arm’s-length transaction.

36. Which of the following events most likely indicates the existence of
related parties?
A. Making a loan without scheduled terms of repayment of the funds.
B. Discussing merger terms with a company that is a major competitor.
C. Selling real estate at a price that differs significantly from its book
value.
D. Borrowing a large sum of money at a variable rate of interest.

37. Which of the following statements is correct concerning related-party

transactions?
A. In the absence of evidence to the contrary, related-party transactions
should be assumed to be outside the ordinary course of business.
B. An auditor should determine whether a particular transaction would
have occurred if the parties had not been related.
C. An auditor should substantiate that related-party transactions were
consummated on terms equivalent to those that prevail in arm’s-
length transactions.
D. The audit procedures directed toward identifying related-party
transactions should include considering whether transactions are
occurring, but are not being given proper accounting recognition.

TOPIC 4 - INTERNAL CONTROL

1. Inherent limitations in an entity’s internal control system include all of

the following, except

a. collusion among employees

b. segregation of incompatible duties

c. the possibility of management override

d. mistakes in judgment
2. When obtaining an understanding of controls that are relevant to the
audit, the auditor shall

I – evaluate design of the controls

II – determine whether they have been implemented

III – determine whether they are effective or not in preventing

and/or detecting material misstatements

a. I, II and III

b. I and II only

c. III only

d. II and III only

3. Which of the following does not fall within the entity’s control activities?

a. Authorization of transactions

b. Physical controls

c. Segregation of incompatible duties

d. Management philosophy and operating style

4. This internal control component is the foundation for all other

components. It sets the tone of the organization, provides discipline and
structure, and influences the control consciousness of employees.

a. control activities

b monitoring of controls

c. control environment

d. the entity’s risk assessment process

5. When considering internal control, an auditor should be aware of the

concept of reasonable assurance, which recognizes that

a. Internal control may be ineffective due to mistakes in judgment and

personal carelessness.
b. Adequate safeguards over access to assets and records should permit an
entity to maintain proper accountability.

c. Establishing and maintaining internal control is an important

responsibility of management.

d. The cost of an entity’s internal control should not exceed the benefits
expected to be derived.

6. Proper segregation of functional responsibilities calls for separation of

the functions of

a. Authorization, execution, and payment.

b. Authorization, recording, and custody.

c. Custody, execution, and reporting.

d Authorization, payment, and recording.

7. An entity’s ongoing monitoring activities often include

a. Periodic audits by the audit committee.

b. Reviewing the purchasing function.

c. The audit of the annual financial statements.

d. Control risk assessment in conjunction with quarterly reviews.

8. The overall attitude and awareness of an entity’s board of directors

concerning the importance of internal control usually is reflected in its

a. Computer-based controls.

b. System of segregation of duties.

c. Control environment.

d. Safeguards over access to assets.

9. Which of the following does not fall within the entity’s control
environment?
 a. Commitment to competence

b. Participation of those charged with governance

c. Communication and enforcement of integrity and ethical values

d. Information processing

10. After obtaining an understanding of internal control and assessing the

risk of material misstatement, an auditor decided to perform tests of
controls. The auditor most likely decided that

a. It would be efficient to perform tests of controls that would result in a

reduction in planned substantive tests.

b. Additional evidence to support a further reduction in the risk of material

misstatement is not available.

c. An increase in the assessed level of the risk of material misstatement is

justified for certain financial statement assertions.

d. There were many internal control weaknesses that could allow

misstatements to enter the accounting system.

11. Which of the following procedures concerning accounts receivable

would an auditor most likely perform to obtain evidence in support of an
assessed level of control risk below the maximum?

a. Observing an entity’s employee prepare the schedule of past due

accounts receivable.

b. Sending confirmation requests to an entity’s principal customers to verify

the existence of accounts receivable.

c. Inspecting an entity’s analysis of accounts receivable for unusual

balances.

d. Comparing an entity’s uncollectible accounts expense to actual

uncollectible accounts receivable.
12. A procedure that involves tracing a transaction from its origination
through the company’s information systems until it is reflected in the
company’s financial report is referred to as a(n)

a. Analytical analysis.

b. Substantive procedure.

c. Test of a control.

d. Walk-through.

13. Which of the following procedures would an auditor most likely perform
to test controls relating to management’s assertion about the completeness
of cash receipts for cash sales at a retail outlet?

a. Observe the consistency of the employees’ use of cash registers and

tapes.

b. Inquire about employees’ access to recorded but undeposited cash.

c. Trace deposits in the cash receipts journal to the cash balance in the
general ledger.

d. Compare the cash balance in the general ledger with the bank
confirmation request.

14. Tracing shipping documents to prenumbered sales invoices provides

evidence that

a. No duplicate shipments or billings occurred.

b. Shipments to customers were properly invoiced.

c. All goods ordered by customers were shipped.

d. All prenumbered sales invoices were accounted for.

15. Which of the following controls most likely would reduce the risk of
diversion of customer receipts by an entity’s employees?

a. A bank lockbox system.

b. Prenumbered remittance advices.

c. Monthly bank reconciliations.

d. Daily deposit of cash receipts.

16. Which of the following controls most likely would assure that all billed
sales are correctly posted to the accounts receivable ledger?

a. Daily sales summaries are compared to daily postings to the accounts

receivable ledger.

b. Each sales invoice is supported by a prenumbered shipping document.

c. The accounts receivable ledger is reconciled daily to the control account

in the general ledger.

d. Each shipment on credit is supported by a prenumbered sales invoice.

17. Which of the following controls most likely would be effective in

offsetting the tendency of sales personnel to maximize sales volume at the
expense of high bad debt write-offs?

a. Employees responsible for authorizing sales and bad debt write-offs are
denied access to cash.

b. Shipping documents and sales invoices are matched by an employee who

does not have authority to write off bad debts.

c. Employees involved in the credit-granting function are separated from

the sales function.

d. Subsidiary accounts receivable records are reconciled to the control

account by an employee independent of the authorization of credit.

18. Proper authorization of write-offs of uncollectible accounts should be

approved in which of the following departments?

a. Accounts receivable.

b. Credit.

c. Accounts payable.
d. Treasurer.

19. During the consideration of a small business client’s internal control,

the auditor discovered that the accounts receivable clerk approves credit
memos and has access to cash. Which of the following controls would be
most effective in offsetting this weakness?

a. The owner reviews errors in billings to customers and postings to the

subsidiary ledger.

b. The controller receives the monthly bank statement directly and

reconciles the checking accounts.

c. The owner reviews credit memos after they are recorded.

d. The controller reconciles the total of the detail accounts receivable

accounts to the amount shown in the ledger.

20. To provide assurance that each voucher is submitted and paid only
once, an auditor most likely would examine a sample of paid vouchers and
determine whether each voucher is

a. Supported by a vendor’s invoice.

b. Stamped “paid” by the check signer.

c. Prenumbered and accounted for.

d. Approved for authorized purchases.

21. Which of the following controls most likely addresses the completeness
assertion for inventory?

a. Work in process account is periodically reconciled with subsidiary

records.

b. Employees responsible for custody of finished goods do not perform the

receiving function.

c. Receiving reports are prenumbered and periodically reconciled.

d. There is a separation of duties between payroll department and inventory
accounting personnel.

22. Kappa Company uses its sales invoices for posting perpetual inventory
records. Inadequate controls over the invoicing function allow goods to be
shipped that are not invoiced. The inadequate controls could cause an

a. Understatement of revenues, receivables, and inventory.

b. Overstatement of revenues and receivables, and an understatement of

inventory.

c. Understatement of revenues and receivables, and an overstatement of

inventory.

d. Overstatement of revenues, receivables, and inventory.

23. In determining the effectiveness of an entity’s controls relating to the

existence or occurrence assertion for payroll transactions, an auditor most
likely would inquire about and

a. Observe the segregation of duties concerning personnel responsibilities

and payroll disbursement.

b. Inspect evidence of accounting for prenumbered payroll checks.

c. Recompute the payroll deductions for employee fringe benefits.

d. Verify the preparation of the monthly payroll account bank reconciliation.

24. Which of the following controls would an entity most likely use to assist
in satisfying the completeness assertion related to long-term investments?

a. Senior management verifies that securities in the bank safe-deposit box

are registered in the entity’s name.

b. The internal auditor compares the securities in the bank safe-deposit box
with recorded investments.
c. The treasurer vouches the acquisition of securities by comparing brokers’
advices with canceled checks.

d. The controller compares the current market prices of recorded

investments with the brokers’ advices on file.

25. Internal control is strengthened when the quantity of merchandise

ordered is omitted from the copy of the purchase order sent to the

a. Department that initiated the requisition.

b. Receiving department.

c. Purchasing agent.

d. Accounts payable department.

26. A client erroneously recorded a large purchase twice. Which of the

following internal control measures would be most likely to detect this error
in a timely and efficient manner?

a. Footing the purchases journal.

b. Reconciling vendors’ monthly statements with subsidiary payable ledger

accounts.

c. Tracing totals from the purchases journal to the ledger accounts.

d. Sending written quarterly confirmations to all vendors.

27. Sound internal control dictates that defective merchandise returned by

customers should be presented initially to the

a. Salesclerk.

b. Purchasing clerk.

c. Receiving clerk.

d. Inventory control clerk.

28. An auditor vouched data for a sample of employees in a payroll register
to approved clock card data to provide assurance that

a. Payments to employees are computed at authorized rates.

b. Employees work the number of hours for which they are paid.

c. Segregation of duties exist between the preparation and distribution of

the payroll.

d. Controls relating to unclaimed payroll checks are operating effectively.

29. Which of the following is a control that most likely could help prevent
employee payroll fraud?

a. The personnel department promptly sends employee termination notices

to the payroll supervisor.

b. Employees who distribute payroll checks forward unclaimed payroll

checks to the absent employees’ supervisors.

c. Salary rates resulting from new hires are approved by the payroll
supervisor.

d. Total hours used for determination of gross pay are calculated by the
payroll supervisor.

30. To minimize the opportunities for fraud, unclaimed cash payroll should
be

a. Deposited in a safe-deposit box.

b. Held by the payroll custodian.

c. Deposited in a special bank account.

d. Held by the controller.

31. Which of the following departments most likely would approve changes
in pay rates and deductions from employee salaries?

a. Personnel.

b. Treasurer.

c. Controller.

d. Payroll.

32. A weakness in internal control over recording retirements of equipment

may cause an auditor to

a. Inspect certain items of equipment in the plant and trace those items to
the accounting records.

b. Review the subsidiary ledger to ascertain whether depreciation was

taken on each item of equipment during the year.

c. Trace additions to the “other assets” account to search for equipment

that is still on hand but no longer being used.

d. Select certain items of equipment from the accounting records and locate
them in the plant.

33. 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.
34. In general, material fraud perpetrated by which of the following are
most difficult to detect?

a. Cashier.

b. Keypunch operator.

c. Internal auditor.

d. Controller.

TOPIC 5 - PHILIPPINE ACCOUNTANCY ACT OF 2004 (RA9298)

1. The objectives of the Philippine Accountancy Act of 2004 are the
following, except:
a. Standardization and regulation of accounting education.
b. Integration of accountancy profession.
c. Examination for registration of certified public accountants.
d. Supervision, control and regulation of the practice of accountancy.

2. Practice of Public Accountancy shall constitute in a person:

a. When involved in decision making requiring professional knowledge in
the science of accounting, as well as the accounting aspects of finance
and taxation.

b. When he/she is appointed in an accounting professional group in

government or in a government-owned and/or controlled corporation,
including those performing proprietary functions, where decision-
making requires professional knowledge in the science of accounting

c. When he or she is involved in teaching of accounting, auditing,

management advisory services, accounting aspect of finance, business
law, taxation and other technically related subjects.

d. When a person is skilled in the knowledge, science and practice of

accounting and as a qualified person to render professional services as
a CPA

3. Any position in any business or company in the private sector which

requires supervising the recording of financial transactions, preparation
of financial statements, coordinating with the external auditors for the
audit of such financial statements and other related functions shall be
occupied only by a duly registered CPA. Provided
 I. That the business or company where the above position exists has a
paid-up capital of at least P10,000,000 and/or annual revenue of at
least P5,000,000
II. The above provision shall apply only to persons to be employed after
the effectivity of the Implementing Rules and Regulations of RA 9298

III. The above provision shall not result to deprivation of the

employment of incumbents to the position
a. I, II and III c. II and III
b. I and II d. I and III

4. The following statements relate to the Board of Accountancy. Which

statement is incorrect?
a. The Board consists of a Chairman and six members
b. The Chairman and members are appointed by the President of the
Philippines upon recommendation of PRC

c. No person shall be appointed a member of the Board unless he is a

natural-born citizen of the Philippines, a duly registered CPA and has
been in the practice of accountancy for at least ten years

d. The Professional Regulation Commission may remove from the Board

any member who is found guilty of political offense.

5. Which of the following is incorrect regarding the qualifications of

members of the Board of Accountancy?
a. Must be a natural-born citizen and resident of the Philippines
b. Must be a duly registered Certified Public Accountant with at least
fifteen (15) years of work experience in any scope of practice of
accountancy
c. Must be of good moral character and must not have been convicted
of crimes involving moral turpitude
d. Must not have any pecuniary interest, directly or indirectly, in any
school, college, university where review classes in preparation for the
licensure examination are being offered or conducted

6. No person shall serve the Professional Regulatory Board of

Accountancy for more than
a. 3 years c. 9 years

b. 6 years d. 12 years

7. The Board shall exercise the following specific powers, functions and
responsibilities:
a b c d
 To supervise the registration,
licensure and practice of
accountancy Ye Ye Ye Ye
s s s s

To issue, suspend, revoke, or

reinstate the Certificate of
registration for the practice of
accountancy Ye N Ye Ye
s o s s

To monitor the conditions

affecting the practice of
accountancy Ye Ye N Ye
s s o s

To conduct an oversight into the

quality of audits of financial
statements Ye N Ye N
s o s o

8. The creation of FRSC and AASC is intended to assist the BOA in

carrying out its function to
a. To monitor the conditions affecting the practice of accountancy and
adopt such measures, rules and regulations and best practices as may
be deemed proper for the enhancement and maintenance of high
professional, ethical, accounting and auditing standards.

b. To supervise the registration, licensure and practice of accountancy in

the Philippines.

c. To prescribe and adopt the rules and regulations necessary for

carrying out the provisions of RA 9298.
d. To prepare, adopt, issue or amend the syllabi of the subjects for
examinations.

9. A study, appraisal, or review by the BOA or its duly authorized

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

10. Which of the following is not a requisite in applying for the CPA
licensure examinations?
a. Natural-born citizen of the Philippines.

b. Good moral character.

c. Holder of the degree of Bachelor of Science in Accountancy.

d. Has not been convicted of any criminal offense involving moral

turpitude.

11. The Board, subject to the approval of the Commission, may revise or
exclude any of the subjects and their syllabi, and add new ones as the
need arises. Provided that the change shall not be more often than every
a. 2 years c. 4 years

b. 3 years d. 5 years

12. The following statements relate to CPA examination ratings. Which

statement is incorrect?
a. To pass the examination, candidates should obtain a general weighted
average of 75% and above, with no rating in any subject less than
65%.
b. Candidates who obtain a rating of 75% and above in at least four
subjects shall receive a conditional credit for the subjects passed.
c. Conditioned candidates shall take an examination in the remaining
subject within three years from the preceding examination.
d. Candidates who fail in two (2) complete CPA examinations may be
allowed to take examinations a third time provided he or she will
comply with Sec. 18 of this Act.

13. According to Section 20 of the Philippine Accountancy Act of 2004

(RA 9298), a Professional Identification Card bearing the registration
number, date of issuance, expiry date, duly signed by the chairperson of
the PRC, shall likewise be issued to every registrant renewable every
a. one (1) year c. three (3) years
b. two (2) years d. five (5) years

14. The BOA shall refuse the registration of any person who successfully
passed the CPA examinations if
 a. Convicted by a court of competent jurisdiction of a criminal offense
involving moral turpitude
b. Having an unsound mind
c. Guilty of immoral and dishonorable conduct
d. All of the following are grounds for refusal

15. A CPA whose certificate have been revoked may be reinstated if he

has acted in exemplary manner and has not committed any illegal,
immoral or dishonorable conduct for a period not less than
a. One year
b. Two years
c. Five years
d. The period depends on the seriousness of his offense

16. The Continuing Professional Education (CPE) program mentioned in

the IRR shall have the following objectives, except:
a. To promote the general welfare of the public

b. To provide and ensure the continuous education of accountancy

students with the latest trends in the profession brought about by
modernization and scientific and technological advancement

c. To raise and maintain the professionals capability for delivering

professional services

d. To attain and maintain the highest standards and quality in the

practice of the profession

17. The Professional Regulatory Board of Accountancy shall be composed

of a chairman and (LIST A) members to be appointed by the President of
the Philippines from a list of (LIST B) recommendees for each position
and ranked by the Commission, from a list of (LIST C) for each position
submitted by the Accredited Professional Organization (APO).
LIST A LIST B LIST C
a. 6 5 5
b. 7 3 5
c. 6 3 5
d. 7 3 5

18. Who is not permitted by law to practice public accountancy?

a. A partnership of CPAs
b. A solo practitioner
c. A partnership of CPAs, with some non-CPA staff
d. A corporation whose stockholders are all CPAs
19. Under the IRR of RA 9298, if a partner in a two-member partnership
dies, the surviving partner may continue to practice as an individual
under the existing firm title which includes the deceased partner’s name
a. For a period of time not to exceed five years.
b. For a period of time not to exceed two years.
c. Indefinitely.
d. Until the partnership payout to the deceased partner’s estate is
terminated.

20. Which of the following statements about the composition of the Board
of Accountancy is incorrect?
a. The four sectors in the practice of accountancy shall as much as
possible equitably represented in the Board.
b. The Board shall be composed of a chairman and six members.
c. The members of the Board shall be appointed by the President of the
Philippines from a list of three recommendees for each position and
ranked by the Commission, from a list of five nominees for each
position submitted by the Accredited Professional Organization
(APO).
d. The Board shall elect a vice-chairman from among its members to
serve for a term of three years.

21. According to the Philippine Accountancy Act of 2004 (RA 9298), any
person who shall violate RA 9298 or any of its implementing rules and
regulations as promulgated by the Board of Accountancy subject to the
approval of the PRC, shall, upon conviction, be punished by a fine
a. not less fifty thousand pesos (P50,000), or by imprisonment for a
period not exceeding three (3) years, or both
b. not less one hundred thousand pesos (P100,000), or by imprisonment
for a period not exceeding two (2) years, or both
c. not less fifty thousand pesos (P50,000), or by imprisonment for a
period not exceeding two (2) years, or both
d. not less one hundred fifty thousand pesos (P150,000), or by
imprisonment for a period not exceeding three (3) years, or both

22. Which of the following is not among the qualifications of a member of

the Board of Accountancy?
a. He/She must have at least 10 years of experience in the practice of
accountancy.
b. He/She must be a natural-born CPA and a resident of the Philippines.
c. He/She must not be a director or officer of the accredited national
professional organization at the time of appointment.
d. He/She must not have any direct or indirect pecuniary interest in any
school offering BS Accountancy degree.
23. The Financial Reporting Standards Council (FRSC) shall be composed
of a chairman and
a. 14 members b. 17 members c. 8 members d. 15
members

24. The following are represented both to the Financial Reporting

Standards Council (FRSC) and Auditing and Assurance Standards
Council (AASC), except
a. COA b. BIR c. SEC d. BOA

25. The following are the qualifications of applicants for CPA

Examinations, except
I. must be a natural born Filipino citizen
II. must be a BS Accountancy

III. Must be of good moral character

IV. Must be at least 21 years old

a. I only b. II and IV c. IV only d. I and IV

26. Which of the following shall be issued to a candidate who passes the
CPA licensure examination?
a. Certificate of Accreditation to practice public accountancy and PRC ID
b. Personal identification card and a certificate of accreditation to
practice public accountancy.
c. Certificate of registration and professional identification card
d. Certificate of full compliance and PRC ID

27. According to RA 9298, if a partner in a two-member partnership dies,

the surviving partner may continue to practice as an individual under
the existing firm title which includes the deceased partner’s name
a. For a period of time not to exceed 5 years
b. For a period of time not to exceed 2 years
c. Indefinitely
d. Until the partnership pay-out to the deceased partner’s estate is
terminated

28. Below are names of four CPA firms and pertinent facts relating to
them. Unless otherwise indicated, the individuals named are CPAs and
partners and there are no other partners. Which firm name and related
facts indicate a violation of the Philippine Accountancy Act of 2004?
 a. Binhi, binti and Bigti, CPAs (Bigti died about 5 years ago; Binhi and
Binti are continuing the firm)
b. John Paul and Timothy James, CPAs (The name of Judas, CPA, a third
partner is omitted from the firm name)
c. Bitay and Bigo, CPAs (Bitay died about 3 years ago; Bigo is continuing
the firm as a sole practitioner)
d. J. Salosagcol and Co., CPAs (J. Salosagcol has 10 other partners who
are all partners).

29. The (LIST A) shall be composed of a chairman and 6 members to be

appointed by the (LIST B) from a list of 3 recommendees for each
position and ranked by the Commission, from a list of 5 nominees for
each position submitted by the (LIST C).
LIST A LIST B LIST C
a. BOA PICPA President of the Philippines
b. BOA President of the Phils. Accredited Professional Org.
c. PICPA BOA PRC
d. BOA President of the Phils. PRC

30. The sector that is most represented in the AASC is the

a. Commerce and Industry c. Public Practice

b. Academe d. Government

TOPIC 7 - AUDIT SAMPLING

1. The risk that the auditor’s conclusion based on a sample may be different
from the conclusion if the entire population were subjected to the same
audit procedure is
A. Sampling risk
B. Audit risk
C. Non-sampling risk
D. Detection risk

2. Sampling risk is an inherent part of sampling that results from

A. Inappropriate audit procedures
B. Failure to properly plan the audit
C. Testing less than the entire population
D. Weaknesses in the internal control system

3. Which of the following does not constitute non-sampling risk?

A. Use of inappropriate audit procedures
B. Misinterpretation of audit evidence
C. Failure to recognize a misstatement or deviation
D. Failure of a sample to represent the population

4. One way to reduce sampling risk is to

A. Carefully design the audit procedures to be used
B. Provide for proper planning and supervision of audit staff
C. Use an appropriate method of selecting sample items from the
population
D. Use variables sampling rather than attributes sampling

5. The decision whether to use statistical or non-statistical sampling

depends upon the
A. Philippine Standards on Auditing C. Size of the population
B. Auditor’s judgment D. Generally Accepted Auditing
Standards

6. Audit sampling for substantive tests is appropriate when

A. Analytical procedures are used
B. The population contains small but large value items
C. The auditor wants to eliminate sampling risk
D. Tests of details are performed

7. Audit sampling for tests of control is generally appropriate when

A. The control leaves evidence of performance
B. The control is not effective
C. 100 % of the transactions is tested
D. The control leaves no evidence of performance

8. A rate of deviation from prescribed internal control procedures set by the

auditor in respect of which the auditor seeks to obtain an appropriate level
of assurance that the rate of deviation set by the auditor is not exceeded by
the actual rate of deviation in the population is
A. Tolerable misstatement C. Anomaly
B. Tolerable rate of deviation D. Expected misstatement

9. Sampling risk that leads the auditor to conclude that controls are more
effective than they actually are is
A. Risk of assessing control risk too low C. Risk of incorrect rejection
B. Risk of assessing control risk too high D. Risk of incorrect
acceptance

10. Sampling risk that leads the auditor to conclude that a material
misstatement exists when in fact it does not is
A. Risk of assessing control risk too low C. Risk of incorrect
rejection
B. Risk of assessing control risk too high D. Risk of incorrect
acceptance
11. Of the four erroneous conclusions from a sampling risk, the auditor is
primarily concerned with
A. Risk of assessing control risk too low C. Risk of incorrect
rejection
B. Risk of assessing control risk too high D. Risk of incorrect
acceptance
12. The process of dividing a population into subpopulations, each of which
is a group of sampling units which have similar characteristics (often
monetary value) is
A. Division C. Grouping
B. Stratification D. Characterization

13. How would increases in tolerable misstatement and assessed level of

control risk affect the sample size in a substantive test of details?

Increase in tolerable misstatement Increase in assessed level of control risk

A. Increase sample size Increase sample size
B. Increase sample size Decrease sample size
C. Decrease sample size Increase sample size
D. Decrease sample size Decrease sample size

14. Which of the following is not a likely item on which to apply stratification
techniques?
A. Aging of accounts receivable
B. Dollar value of accounts receivable
C. Customer names of account receivables
D. Number of sales per customer in a period

15. For which of the following audit tests would an auditor most likely use
attribute sampling?
A. Making an independent estimate of the amount of a LIFO inventory.
B. Examining invoices in support of the valuation of fixed asset additions.
C. Selecting accounts receivable for confirmation of account balances.
D. Inspecting employee time cards for proper approval by supervisors.

16. Which of the following statistical selection techniques is least desirable

for use by an auditor?
A. Systematic selection.
B. Stratified selection.
C. Block selection.
D. Sequential selection.

17. In statistical sampling methods used in substantive testing, an auditor

most likely would stratify a population into meaningful groups if
A. The population has highly variable recorded amounts
B. Value-weighted sampling is used
C. The auditor’s estimated tolerable misstatement is extremely small
D. The standard deviation of recorded amounts is relatively small

18. What is the primary objective of using stratification as a sampling

method in auditing?
A. To increase the confidence level at which a decision will be reached from
the results of the sample selected.
B. To determine the occurrence rate for a given characteristic in the
population being studied.
C. To decrease the effect of variance in the total population.
D. To determine the precision range of the sample selected.

19. As a result of tests of controls, an auditor assessed control risk too low
and decreased substantive testing. This assessment occurred because the
true deviation rate in the population was
A. Less than the risk of assessing control risk too low, based on the auditor’s
sample.
B. Less than the deviation rate in the auditor’s sample.
C. More than the risk of assessing control risk too low, based on the
auditor’s sample.
D. More than the deviation rate in the auditor’s sample.

20. An auditor is testing internal control procedures that are evidenced on

an entity’s vouchers by matching random numbers with voucher numbers. If
a random number matches the number of a voided voucher, that voucher
ordinarily should be replaced by another voucher in the random sample if
the voucher
A. Constitutes a deviation.
B. Has been properly voided.
C. Cannot be located.
D. Represents an immaterial dollar amount.

21. An auditor plans to examine a sample of twenty purchase orders for

proper approvals as prescribed by the client’s control procedures. One of
the purchase orders in the chosen sample of twenty cannot be found, and
the auditor is unable to use alternative procedures to test whether that
purchase order was properly approved. The auditor should
A. Choose another purchase order to replace the missing purchase order in
the sample.
B. Consider this test of control invalid and proceed with substantive tests
since internal control cannot be relied upon.
C. Treat the missing purchase order as a deviation for the purpose of
evaluating the sample.
D. Select a completely new set of twenty purchase orders.
22. In which sampling method is the probability of selection of an item
proportional to the size or value of the item (P 100,000 item is 10 times
more likely to be selected than a P 1,000 item)?
A. Discovery sampling
B. Ratio estimation
C. Value weighted sampling
D. Stratified sampling

23. If the auditor is concerned that a population may contain exceptions, the
determination of a sample size sufficient to include at least one such
exception is a characteristic of
A. Discovery sampling.
B. Variables sampling.
C. Random sampling.
D. Dollar-unit sampling.

24. What is an auditor’s evaluation of a statistical sample for attributes

when a test of fifty documents results in three deviations if tolerable rate is
7%, the expected population deviation rate is 5%, and the allowance for
sampling risk is 2%?
A. Modify the planned assessed level of control risk because the tolerable
rate plus the allowance for sampling risk exceeds the expected population
deviation rate.
B. Accept the sample results as support for the planned assessed level of
control risk because the sample deviation rate plus the allowance for
sampling risk exceeds the tolerable rate.
C. Accept the sample results as support for the planned assessed level of
control risk because the tolerable rate less the allowance for sampling risk
equals the expected population deviation rate.
D. Modify the planned assessed level of control risk because the sample
deviation rate plus the allowance for sampling risk exceeds the tolerable
rate.
25. In the past, the auditors have found that the book value of a receivable
account has been related to the amount the account is misstated (i.e., large
accounts have large misstatements and small accounts have small
misstatements). Which of the following techniques is most likely to be
efficient?
A. Mean-per-unit estimation.
B. Ratio estimation.
C. Difference estimation.
D. Sequential sampling estimation.

26. Using statistical sampling to assist in verifying the year-end accounts

payable balance, an auditor has accumulated the following data:

Using the ratio estimation technique, the auditor’s estimate of year-end

accounts payable balance would be
A. $6,150,000
B. $6,000,000
C. $5,125,000
D. $5,050,000

TOPIC 8 - COMPLETING THE AUDIT

Subsequent Events

1. In accordance with PSA 560, subsequent events refer to

A. events occurring between the period end and the date of the auditor’s
report
B. facts discovered after the date of the auditor’s report
C. events occurring between the period end and the date of the auditor’s
report and facts discovered after the date of the auditor’s report
D. events occurring between the week immediately before the end of the
period and the date of the auditor’s report

2. Which of the following procedures would an auditor ordinarily perform

during the review of subsequent events?
A. Review the cutoff bank statements for the period after the year-end
B. Inquire of the client’s legal counsel concerning litigation
C. Investigate reportable conditions previously communicated to the
client
D. Analyze related party transactions to discover possible irregularities
3. Which of the following situations would require adjustment to, or
disclosure in, the financial statements?
A. a merger discussion
B. the application for a patent on a new production process
C. discussion with a customer that could lead to a 40 % increase in sales
D. the bankruptcy of a customer who regularly purchased 30 % of the
company’s output

4. Which of the following events occurring after the issuance of an auditor’s

report most likely would cause the auditor to make further inquiries about
the previously issued financial statements?
A. An uninsured natural disaster occurs that may affect the entity’s
ability to continue as a going concern.
B. A contingency is resolved that had been disclosed in the audited
financial statements.
C. New information is discovered concerning undisclosed lease
transactions of the audited period.
D. A subsidiary is sold that accounts for 25% of the entity’s consolidated
net income.

5. Which of the following subsequent events is most likely to result in an

adjustment to a company’s financial statements?
A. Merger or acquisition activities.
B. Bankruptcy (due to deteriorating financial condition) of a customer
with an outstanding accounts receivable balance.
C. Issuance of common stock.
D. An uninsured loss of inventories due to a fire.

6. Which of the following would be a subsequent discovery of facts which

would not require a response by the auditor?
A. Discovery of the inclusion of material nonexistent sales.
B. Discovery of the failure to write off material obsolete inventory.
C. Discovery of the omission of a material footnote.
D. Decrease in the value of investments.

7. Zero Corp. suffered a loss that would have a material effect on its
financial statements on an uncollectible trade account receivable due to a
customer’s bankruptcy. This occurred suddenly due to a natural disaster ten
days after Zero’s balance sheet date, but one month before the issuance of
the financial statements and the auditor’s report. Under these
circumstances,

The event The auditor’s

requires FS report should be
The FS should be disclosure but no modified for a
 adjusted adjustment lack of
consistency
A Yes No No
.
B Yes No Yes
.
C No Yes Yes
.
D No Yes No
.

8. After an audit report containing an unqualified opinion on a nonissuer

(nonpublic) client’s financial statements was issued, the client decided to
sell the shares of a subsidiary that accounts for 30% of its revenue and 25%
of its net income. The auditor should
A. Determine whether the information is reliable and, if determined to be
reliable, request that revised financial statements be issued.
B. Notify the entity that the auditor’s report may no longer be associated
with the financial statements.
C. Describe the effects of this subsequently discovered information in a
communication with persons known to be relying on the financial
statements.
D. Take no action because the auditor has no obligation to make any
further inquiries.

9. A client acquired 25% of its outstanding capital stock after year-end and
prior to completion of the auditor’s fieldwork. The auditor should
A. Advise management to adjust the balance sheet to reflect the
acquisition.
B. Issue pro forma financial statements giving effect to the acquisition as
if it had occurred at year-end.
C. Advise management to disclose the acquisition in the notes to the
financial statements.
D. Disclose the acquisition in the opinion paragraph of the auditor’s
report.

10. The following events occurred subsequent to the balance sheet date,
December 31, 2018. Which of these would require adjustment to the
financial statements before they are issued?
A. A Company converted majority of its convertible bonds into ordinary
shares.
B. B Company lost all of its cement line due to a flash flood that hit the
area.
C. C Company settled its damages payable, originally estimated at P
1,000,000, by paying P 1,200,000 to the parties concerned. The
 damages have arisen from an accident in C Company’s plant in
October 2018.
D. D Company acquired E Company through stock acquisition.

11. Which of the following procedures should an auditor generally perform

regarding subsequent events?
A. Compare the latest available interim financial statements with the
financial statements being audited.
B. Send second requests to the client’s customers who failed to respond
to initial accounts receivable confirmation requests.
C. Communicate material weaknesses in internal control to the client’s
audit committee.
D. Review the cutoff bank statements for several months after the year-
end.

Litigations, Claims, Assessments

12. The primary source of information to be reported about litigation, claims

and assessments is the
A. client’s lawyer
B. court records
C. client’s management
D. independent auditor

13. Regarding litigations, the auditor’s primary means of obtaining

corroboration of management’s information is
A. letter of corroboration from the auditor’s lawyer upon review of the
legal documentation
B. confirmation of claims and assessments from the other parties to the
litigation
C. letter of audit inquiry to the client’s lawyer
D. confirmation of claims and assessments from an officer of the court
presiding over the litigation

14. Which of the following procedures might be useful in discovering a

contingent liability for a lawsuit that management is intentionally
neglecting to disclose?
A. Inquiries (orally and in writing) of management.
B. Analyzing legal expense and review invoices and statements from
outside legal counsel.
C. Reviewing current and previous years’ internal revenue agent reports.
D. Obtaining a letter of representation from management that it is aware
of no undisclosed contingent liabilities.

15. The primary reason an auditor requests letters of inquiry be sent to a

client’s attorneys is to provide the auditor with
 A. The probable outcome of asserted claims and pending or threatened
litigation.
B. Corroboration of the information furnished by management about
litigation, claims, and assessments.
C. The attorneys’ opinions of the client’s historical experiences in recent
similar litigation.
D. A description and evaluation of litigation, claims, and assessments
that existed at the balance sheet date.

16. When obtaining evidence regarding litigation against a client, the

auditor would be least interested in determining
A. the period in which the underlying causes of litigation occurred
B. an estimate of when the matter will be resolved
C. an estimate of the potential loss
D. the probability of an unfavorable outcome

Final Review Stage Analytical Procedures

17. The primary objective of analytical procedures used in the final review
of an audit is to
A. obtain evidence from details tested to corroborate particular
assertions
B. identify areas that represent specific risks relevant to the audit
C. assist the auditor in assessing the validity of the conclusions reached
D. satisfy doubts when questions arise about a client’s ability to continue
in existence

18. 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 management’s
financial statement assertions

19. At what stages of the audit must analytical procedures be used?

A. Planning and testing.
B. Testing and completion.
C. Planning and completion.
D. Planning, testing, and completion.

20. Analytical procedures used in the overall review stage of an audit

generally include
A. considering unusual or unexpected account balances that were not
previously identified
B. performing tests of transactions to corroborate management’s financial
statement assertions
C. gathering evidence concerning account balances that have not changed
from the prior year
D. re-testing control procedures that appeared to be ineffective during the
assessment of control risk

21. Where an unusual fluctuation is indicated by analytical procedures and

management is unable to provide satisfactory explanation, the auditor must
assume that there is a high probability that an error or irregularity exists. In
this case, the auditor should
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
exists

22. Analytical procedures applied in the completion stage of the audit

include
A B C D
 identifying unusual fluctuations that were
not previously identified Yes Yes Yes Yes
 assessing the validity of the conclusions reached Yes No Yes No

 evaluating the overall financial statement

presentation No Yes Yes No

Assessment of Going Concern

23. When should auditors generally assess a client’s ability to continue as a

going concern?
A. Upon completion of the audit.
B. During the planning stages of the audit.
C. Throughout the entire audit process.
D. During testing and completion phases of the audit.

24. Which of the following is true?

A. Management should evaluate the auditor’s assessment of the entity’s
ability to continue as a going concern.
B. Both management and the auditor should assess the entity’s ability to
continue as a going concern simultaneously.
C. The auditor should evaluate management’s assessment of the entity’s
ability to continue as a going concern.
D. Going concern assessments will be performed only in exceptional
cases.
25. When the auditor concludes there is substantial doubt about an entity’s
ability to continue as a going concern for a reasonable period of time
(normally 12 months after balance sheet date), the auditor’s responsibility is
to
A. assess future conditions and events for a period of time not to exceed
12 months following the date of the financial statements
B. determine for propriety and adequacy of note disclosures about the
going concern uncertainty
C. issue a qualified opinion or disclaimer of opinion, depending upon
materiality, due to the possible effects on the financial statements
D. issue a qualified or adverse opinion, depending upon materiality, due
to the possible effects on the financial statements

26. Which of the following audit procedures would most likely assist an
auditor in identifying conditions and events that may indicate that there
could be substantial doubt about an entity’s ability to continue as a going
concern?
A. confirmation of accounts receivable from principal customers
B. confirmation of cash in bank balances
C. review compliance with the terms of debt agreements
D. reconciliation of interest expense with debt restructuring

27. SGB, CPA, believes there is substantial doubt about the ability of XYZ
Co. to continue as a going concern for a reasonable period of time. In
evaluating XYZ’s plans for dealing with the adverse effects of future
conditions and events, SGB, CPA most likely would consider, as a mitigating
factor, XYZ’s plans to
A. accelerate research and development projects related to future
products
B. accumulate treasury stock at prices favorable to XYZ’s historic price
range
C. purchase equipment and production facilities currently being leased
D. dispose its noncash assets to generate funds

28. Which of the following conditions or events most likely would cause an
auditor to have substantial doubt about an entity’s 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. Restrictions on the disposal of principal assets are present.

29. Which of the following conditions or events would cause an auditor to

have substantial doubt about an entity’s ability to continue as a going
concern?
 A. Substantial operating losses
B. Usual trade credit from suppliers is denied.
C. Arrearages in principal stock dividends are paid.
D. both a and b

30. SGB, CPA, believes there is substantial doubt about the ability of XYZ
Co. to continue as a going concern for a reasonable period of time. In
evaluating XYZ’s plans for dealing with the adverse effects of future
conditions and events, SGB, CPA most likely would consider, as a mitigating
factor, XYZ’s plans to
A. obtain additional funding from shareholders and other sources
B. purchase production facilities currently being leased from a related
party
C. strengthen internal controls over cash disbursements
D. all of the above

31. Which of the following audit procedures most likely would assist an
auditor in identifying conditions or events that may indicate substantial
doubt about an entity’s ability to continue as a going concern?
A. inspecting title documents to verify whether any assets are pledged as
collateral
B. confirming with third parties about the details of arrangements to
maintain financial support
C. reconciling the cash balance per books with the cutoff bank statement
and the bank confirmation
D. comparing the entity’s depreciation and asset capitalization policies with
other entities in the industry

32. Which of the following audit procedures would most likely assist an
auditor in identifying conditions or events that may indicate there is a
substantial doubt about an entity’s ability to continue as a going concern?
A. confirmation of bank balances
B. reconciliation of interest expense with debt outstanding
C. review compliance with the terms of the debt agreements
D. confirmation of accounts receivable with principal customers