Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE

PHILIPPINES
COLLEGE OF ACCOUNTANCY AND
ACCO 4093 - AUDITING THEORY
S P E C I A L E X A M I N A T I O N

S P E C I F I C I N S T R U C T I O N S
ENCIRCLE THE LETTER OF CHOICE. ERASURES WILL NOT BE CREDITED.

M U L T I P L E C H O I C E Q U E S T I O N S
(75 questions at 1.33 points each)

1. Broadly defined, the subject matter of any audit consists of

a. Assertions. c. Financial statements.
b. Economic data. d. Operating data.

2. What assurance is provided by the practitioner in an agreed-upon procedures engagement?

a. Absolute b. Moderate c. Reasonable d. No assurance

3. The need for assurance services arises for all of the following reason, except
a. Closeness between a user and the c. Potential bias in providing information.
organization. d. Remoteness between a user and the
b. Complexity of the processing systems. organization.

4. If an auditor believes that material error or fraud exist, the auditor should
a. Consider the implications and discuss the matter with appropriate levels of management.
b. Consider whether errors or fraud where the result of employee's failure to comply with specific controls.
c. Make the investigation necessary to determine whether errors or fraud have in fact occurred.
d. Request that management investigate whether errors or fraud have in fact occurred.

5. The third standard of fieldwork states that sufficient competent evidential matter may in part be obtained through the
following methods, except
a. Confirmation. b. Inspection. c. Observation. d. Reconciliation.

6. On the basis of the 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. Decrease detection risk. c. Increase inherent risk.
b. Decrease substantive testing. d. Increase materiality levels.

7. What is the primary difference between financial reporting risk and audit risk?
a. Demands of users of financial statements c. Risks of being sued by third parties
b. Responsibilities of the respective parties involved d. The application of accounting principles

8. Relationship between control risk and detection risk is ordinarily

a. Direct. b. Equal. c. Inverse. d. Parallel.

9. Results of the financial statement audit are communicated to users through

a. Audit report. c. Written management assertion.
b. Financial statement. d. None of the choices.

10. Users of the audit report can reasonably expect the audited financial statements to be
a. Complete and contain many of the important c. Presented fairly according to the substance of
financial disclosures. generally accepted accounting principles.
b. Free from all errors. d. All of the choices.

11. The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor
a. Assesses the accounting principles used and also evaluates the overall financial statement presentation.
b. Is responsible for expressing an opinion on the financial statements, which are the responsibility of management.
c. Obtains reasonable assurance about whether the financial statements are free of material misstatement.
d. Realizes some matters either individually or in the aggregate, are important while other matters are not important.
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12. A representation letter issued by a client

a. Does not reduce the auditor's responsibility.
b. Is a substitute for testing.
c. Is essential for the preparation of the audit program.
d. Reduces the auditor's responsibility only to the extent that it is relied upon.

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

a. Attaching an audit opinion to the client’s financial statements.
b. Maintaining a clear-cut distinction between management’s representations and the auditor’s representation.
c. Stating in the auditor’s management letter that the examination was made in accordance with generally accepted
auditing standards.
d. Testifying under oath about client’s financial statements.

14. Which of the following statements concerning evidential matter is correct?

a. A client's accounting data cannot be considered sufficient audit evidence to support the financial statements.
b. Appropriate evidence supporting management's assertions should be convincing rather than merely persuasive.
c. Effective internal control contributes little to the reliability of the evidence created within the entity.
d. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should
be obtained.

15. Which of the following is a general principle relating to the reliability of audit evidence?
a. Audit evidence obtained from indirect sources rather than directly is more reliable than evidence obtained directly
by the auditor.
b. Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable
than audit evidence obtained from non-independent sources.
c. Audit evidence provided by copies is more reliable than that provided by facsimiles.
d. Audit evidence provided by original documents is more reliable than audit evidence generated through a system
of effective controls.

16. Which of the following types of audit evidence is the most persuasive?
a. Bank statements obtained from the client c. Client work sheets supporting cost allocations
b. Client representation letter d. Pre-numbered client purchase order forms

17. The most difficult type of misstatement to detect is fraud based on

a. The over-recording of transactions. c. Recorded transactions in subsidiaries.
b. The non-recording of transactions. d. Related party receivables.

18. Which of the following is not normally performed in the pre-planning or pre-engagement phase?
a. Deciding whether to accept or reject an audit c. Making a preliminary estimate of materiality
engagement d. Preparing an engagement letter
b. Inquiring from predecessor auditor

19. 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. Gathering evidence concerning account balances that have not changed from the prior year.
c. Performing test of transactions to corroborate management's financial statement assertions.
d. Re-testing control procedures that appeared to be ineffective during the assessment of control risk.

20. In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the
a. Cost-benefit of gathering evidence. c. Selected audit techniques.
b. Financial statement assertions. d. Timing of audit procedures.

21. Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a new
engagement letter to the client?
a. A change in the terms of engagement c. A recent change of client management
b. A recent change in partner and/or staff involved d. A significant change in the nature or size of the
in the audit engagement client's business

22. The recruitment of senior management for an assurance client, such as those in a position to affect the subject of the
assurance engagement may least likely create
a. Advocacy threat. c. Intimidation threat.
b. Familiarity threat. d. Self-interest threat.

23. To exercise due professional care, an auditor should

a. Attain the proper balance of professional experience and formal education.
b. Critically review the judgment exercised by those assisting in the audit.
c. Design the audit to detect all instances of Illegal acts.
d. Examine all available corroborating evidence supporting management’s assertions.

24. An attitude that includes a questioning mind and a critical assessment of audit evidence is referred to as

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a. Due professional care. c. Reasonable assurance.

b. Professional skepticism. d. Supervision.

25. Who appoints the members of the Professional Regulatory Board of Accountancy?
a. The chairman of the Professional Regulation Commission
b. The chairman of the Professional Regulatory Board of Accountancy
c. The president of the Philippine Institute of Certified Public Accountants
d. The president of the Republic of the Philippines

26. Special/temporary permit may be issued by the Professional Regulatory Board of Accountancy to the following
persons, except
a. A foreign certified public accountant (CPA) called for consultation or specific purpose which is essential for the
development of the country and there is no Filipino CPA qualified for such consultation or specific purpose.
b. A foreign CPA engaged as a professor or lecturer in the fields essential to accountancy education in the
Philippines.
c. A foreign CPA who can prove that the country of which he/she is a citizen admits citizens of the Philippines to the
practice of the same profession without restriction.
d. A foreign CPA with specialization in any branch of accountancy and his/her service is essential for the
advancement of accountancy in the Philippines.

27. The following statements relate to the term of office of the chairman and members of the Professional Regulatory
Board of Accountancy (PRBoA). Which of the following is false?
a. Any vacancy occurring within the term of a member of the PRBoA shall be filled up for the unexpired portion of the
term only.
b. Appointment to fill up an unexpired term is not to be considered as a complete term.
c. No person who has served two successive complete terms as chairman or member of the PRBoA shall be eligible
for reappointment until the lapse of two years.
d. The chairman and members of the PRBoA shall hold office for a term of three years.

28. According to the Philippine Accountancy Act of 2004, how many years can a partner who survived the death or
withdrawal of other partner/s continue to practice under the partnership name after becoming a sole practitioner?
a. 1 b. 2 c. 3 d. 4

29. An effective internal control

a. Can prevent collusion among employees. c. Cannot be circumvented by management.
b. Can reduce the cost of an external audit. d. Eliminates risks and potential loss to the
organization.

30. Proper segregation of functional responsibilities calls for separation of the functions of
a. Authorization, execution, and payment. c. Authorization, recording, and custody.
b. Authorization, payment, and recording. d. Custody, execution, and reporting.

31. Audit evidence on the proper segregation of duties ordinarily is best obtained by
a. Direct personal observation of the employees who apply control activities.
b. Inquiring whether control activities operated consistently throughout the period.
c. Preparation of a flowchart of duties performed by available personnel.
d. Reviewing job descriptions prepared by the personnel department.

32. Which of the following matters is generally included in an auditor's engagement letter?
a. Management's responsibility for the entity's compliance with laws and regulations.
b. Management's vicarious liability for illegal acts committed by its employees.
c. The auditor's responsibility to search for significant internal control deficiencies.
d. The factors to be considered in setting preliminary judgments about materiality.

33. Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that
may indicate there could be substantial doubt about an entity's ability to continue as a going concern?
a. Review compliance with the terms of debt agreements.
b. Confirmation of accounts receivable from principal customers.
c. Reconciliation of interest expense with debt outstanding.
d. Confirmation of bank balances.

34. To operate effectively, an internal auditor must be independent of the

a. Audit committee and the board of directors. c. Entity.
b. Employer-employee relationship which exists for d. Line functions of the organization.
other employees in the organization.

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35. Which of the following conditions would most likely indicate a possible non-compliance with laws and regulations?
a. Media comment c. Payment of commission to sales agent
b. Payment for specified services to consultant d. Purchasing land for a price significantly
different from the seller’s recorded amount

36. The most likely explanation why the auditor's examination cannot reasonably be expected to bring all illegal acts by
the client to the auditor's attention is that
a. Illegal acts are perpetrated by management override of internal control.
b. Illegal acts by clients often relate to operating aspects rather than accounting aspects.
c. Illegal acts may be perpetrated by the only person in the client's organization with access to both assets and the
accounting records.
d. The client's internal control may be so strong that the auditor performs only minimal substantive testing.

37. Which of the following most accurately summarizes what is meant by the term "material misstatement"?
a. Fraud and direct-effect illegal acts c. Material error, material fraud, and certain illegal
b. Fraud involving senior management and acts
material fraud d. Material error and material illegal acts

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

39. A 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. Overstatement of revenues and receivables and an understatement of inventory.
b. Overstatement of revenues, receivables, and inventory.
c. Understatement of revenues and receivables, and an overstatement of inventory.
d. Understatement of revenues, receivables, and inventory.

40. Which of the following is most likely to be presumed to represent fraud risk on an audit?
a. Capitalization of repairs and maintenance into the property, plant, and equipment asset account
b. Improper interest expense accrual
c. Improper revenue recognition
d. Introduction of significant new products

41. If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the
a. Accounting records to the source c. Sales journal to the cash receipts journal.
documents. d. Source documents to the accounting records.
b. Cash receipts journal to the sales journal.

42. An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without
recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves
the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers.
In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all
a. Approved vouchers. c. Vendors' invoices.
b. Cash disbursements. d. Receiving reports.

43. In properly designed internal control, the same employee should not be permitted to
a. Initiate a request to order merchandise and c. Receive merchandise and prepare a receiving report.
approve merchandise received. d. Sign checks and cancel supporting documents.
b. Prepare disbursement vouchers and sign
checks.

44. Which of the following is an effective control over cash payments?

a. A check-signing machine with two signatures should be utilized.
b. Checks should be prepared only by persons responsible for cash receipts and cash disbursements.
c. Signed checks should be mailed under the supervision of the check signer.
d. Spoiled checks that have been voided should be disposed of immediately.

45. In auditing payroll, an auditor most likely would

a. Compare payroll costs with entity standards and budgets.
b. Observe entity employees during a payroll distribution.
c. Trace individual employee deductions to entity journal entries.
d. Verify that checks representing unclaimed wages are mailed.

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46. Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?
a. The budgeted current year's sales with the prior year's sales
b. The budgeted current year's warranty expense with the current year's contingent liabilities
c. The current year's accounts receivable with the prior year's accounts receivable
d. The current year's payroll expense with the prior year's payroll expense

47. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
a. Administrative controls from the internal accounting controls.
b. Authorization of transactions from the custody of related assets.
c. Human resources function from the controllership function.
d. Operational responsibility from the recordkeeping responsibility.

48. When auditing merchandise inventory at year-end, the auditor performs a purchase cut-off test to obtain evidence that
a. All goods owned at year-end are included in the inventory balance.
b. All goods purchased before year-end are received before the physical inventory count.
c. No goods held on consignment for customers are included in the inventory balance.
d. No goods observed during the physical count are pledged or sold.

49. Which of the following is used to obtain evidence that the client's equipment accounts are not understated?
a. Analyzing repairs and maintenance expense c. Re-computing depreciation expense
accounts d. Vouching purchases of plant and equipment
b. Analyzing the miscellaneous revenue account

50. The most effective means for the auditor to determine whether a recorded intangible asset possesses the
characteristics of an asset is to
a. Analyze research and development expenditures to determine that only those expenditures possessing future
economic benefit have been capitalized.
b. Evaluate the future revenue-producing capacity of the intangible asset.
c. Inquire as to the status of patent applications.
d. Register the patent at the Intellectual Property Office to test its validity and acceptability.
e. Vouch the purchase by reference to underlying documentation.

51. The auditor's program for the examination of long-term debt should include steps that require the
a. Examination of any bond trust indenture. c. Investigation of credits to the bond interest
b. Inspection of the accounts payable subsidiary income account.
ledger. d. Verification of the existence of the bondholders.

52. Which of the following controls would an entity most likely use in safeguarding against the loss of marketable
securities?
a. A designated member of the board of directors controls the securities in a bank safe deposit box.
b. An independent trust company that has no direct contact with the employees who have record-keeping
responsibilities has possession of securities.
c. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to
the general ledger.
d. The internal auditor verifies the marketable securities in the entity’s safe each year on the balance sheet date.

53. Which of the following sampling methods would be most appropriate in performing tests of controls over authorization
of cash disbursements?
a. Attributes b. Ratio c. Stratified d. Variables

54. Which of the following factors is/are considered in determining the sample size for a test of controls?
a. Expected deviation rate – No; Tolerable deviation rate – No
b. Expected deviation rate – No; Tolerable deviation rate – Yes
c. Expected deviation rate – Yes; Tolerable deviation rate – No
d. Expected deviation rate – Yes; Tolerable deviation rate – Yes

55. In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the
allowable risk of assessing control risk too low, and the
a. Nature and cause of deviations. c. Risk of incorrect acceptance.
b. Population size. d. Tolerable deviation rate.

56. The two approaches to audit sampling are

a. Precision and reliability. c. Statistical and non-statistical.
b. Random and non-random. d. Stratification and value weighted.

57. Which of the following statements is correct concerning statistical sampling in tests of controls?
a. As the population size doubles, the sample size should also double.
b. Deviations from control procedures at a given rate usually result in misstatements at a higher rate.
c. The qualitative aspects of deviations are not considered by the auditor.
d. There is an inverse relationship between the sample size and the tolerable rate.

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58. Which of the following best illustrates the concept of sampling risk?
a. A randomly chosen sample may not be representative of the population as a whole on the characteristic
of interest.
b. An auditor may fail to recognize errors in the documents examined for the chosen sample.
c. An auditor may select audit procedures that are not appropriate to achieve the specific objective.
d. The documents related to the chosen sample may not be available for inspection.

59. 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.

60. The final step in the evaluation of audit results is the decision to
a. Accept the population as fairly stated or to require further action.
b. Determine sampling error and calculate the estimated total population error.
c. Determine the error in each sample.
d. Project the point estimate.

61. The risk that an auditor will conclude, based on substantive tests, that a material misstatement does not exist in an
account balance when in fact such misstatement does exist is referred to as
a. Detection risk. c. Non-sampling risk.
b. Inherent risk. d. Sampling risk.

62. A number of factors influence the sample size for a substantive test of details of an account balance. Ceteris paribus,
which of the following would lead to a larger sample size?
a. Greater reliance on analytical procedures c. Smaller expected frequency of errors
b. Greater reliance on internal control d. Smaller measure of tolerable misstatement

63. In performing substantive tests, the auditor is concerned with two risks or errors of sampling – the alpha error and the
beta error.
a. The alpha error is of greater concern to the auditor than the beta error.
b. The beta error is of greater concern to the auditor than the alpha error.
c. The alpha error and the beta error are of equal importance to the auditor.
d. Neither the alpha error nor the beta error needs to be considered by the auditor.

64. When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the
sample. This consideration should
a. Be related to preliminary judgments about c. Not be adjusted for qualitative factors.
materiality levels. d. Not be changed during the audit process.
b. Be related to the auditor's business risk.

65. This law provides that compliance with the continuing professional development (CPD) is a mandatory requirement in
the renewal of professional identification cards.
a. Presidential Decree No. 692 – Revised Accountancy Law
b. Republic Act No. 10912 – CPD Act of 2016
c. Republic Act No. 8981 – PRC Modernization Act of 2000
d. Republic Act No. 9298 – Philippine Accountancy Act of 2004

66. Every professional regulatory board shall create a Continuing Professional Development Council which shall be
composed of
a. One Chairperson and five members. c. One Chairperson and three members.
b. One Chairperson and four members. d. One Chairperson and two members.

67. Who is the current Chairperson of the Continuing Professional Development (CPD) Council of the Professional
Regulatory Board of Accountancy?
a. Hon. Gerard B. Sanvictores c. Hon. President Mayor Joseph Ejercito Estrada 
b. Hon. Joel L. Tan-Torres d. PNP Director General Ronald Bato Dela Rosa 

68. The number of credit units required for the accountancy profession is
a. 120 credit units every three years. c. 60 credit units every years.
b. 45 credit units every three years. d. Minimum of 15 credit units per year; 60 credit
units within three years.

69. According to the International Education Standards No. 34 of the International Federation of Accountants, the
competence areas (previously termed as thematic areas) of continuing professional development activities shall be
divided into three major categories. Which of the following is not?
a. Contemporary accounting issues and trends c. Professional values, ethics, and attitudes
b. Professional skills d. Technical competence

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Use the following information to answer the next five questions:

On January 10, 2017, Li Tong Hay Manufacturing Company engaged Ebee Barney and Associates to audit the financial
statements for the year ended December 31, 2016. After understanding the significant processes and performing test of
controls, Ebee determined that the combined risk assessment for all accounts is high.

Ebee is about to perform the substantive procedures for Cash, Accounts Receivable (A/R), Inventory, Property, Plant, and
Equipment (PPE), and Accounts Payable (A/P).

70. Which of the following substantive test will be performed for Cash, A/R, Inventory and PPE, respectively?
a. Test of balances, test of balances, test of balances, and test of details of transactions
b. Test of balances, test of balances, test of details of transactions, and test of details of transactions
c. Test of details of transactions, test of balances, test of balances, and test of details of transactions
d. Test of details of transactions, test of details of transactions, test of balances, and test of balances

71. Assume that Ebee was hired only on January 10, 2017 and was not able to attend the annual inventory count
conducted last December 31, 2016. According to Li Tong Hay Manufacturing Company, they conduct regular
inventory count at the end of each month. What should Ebee do to audit the balance of the Inventory account of as of
December 31, 2016?
a. Ebee needs to immediately ask Li Tong Hay Manufacturing Company on January 10, 2017 to conduct inventory
count; otherwise, it will be considered as a scope limitation and may result to issuance of a qualified opinion.
b. Ebee should attend the January 31, 2017 month-end inventory count and perform roll-backward procedure.
c. Obtain management representation letter for the December 31, 2016 balance of the Inventory account to serve as
a support on the reasonableness of the account.
d. Consider it as a scope limitation and issue a qualified opinion or withdraw from the engagement if deemed
necessary.

72. Ebee will be performing confirmation procedure for A/R. Which of the following customers will be most likely included
first in the confirmation?

Accounts Receivable
Customer Amount Number of Transactions in 2016
A ₱3,000,000 1
B 2,000,000 5
C 1,000,000 2
D 200,000 3
E 0 20

a. Customer A b. Customer B c. Customer C d. Customer E

73. Ebee will be performing confirmation procedure for A/P. Which of the following customers will be most likely included
first in the confirmation?

Accounts Payable
Customer Amount Number of Transactions in 2016
A ₱3,000,000 1
B 2,000,000 5
C 1,000,000 2
D 200,000 3
E 0 20

a. Customer A b. Customer B c. Customer D d. Customer E

74. Assume all information above is the same, except that the combined risk assessment is low for all the accounts.
Which of the following statements is true?
a. A/P confirmation is not necessary since this is not a primary substantive procedure.
b. Confirmation of A/R may not be performed; instead, test of subsequent receipts is more appropriate.
c. Observation of inventory count is not necessary. Management representation letter will suffice as support for the
balance of the Inventory account at December 31, 2016.
d. All of the above statements are true.

75. B O N U S I T E M!  Please shade letter E on your scannable answer sheets.

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