Colegio de San Juan de Letran

College of Business Administration and Accountancy

NAME:_____________________________________________ SECTION______________

MIDTERM EXAMINATION

1. The auditor should consider the nature, extent, and timing of the work to be performed and
should prepare a written audit program for every audit. Which audit standard is most
closely related to this requirement?
a. The audit is to be performed by a person or persons having adequate technical
training and proficiency as an auditor.
b. In all matters relating to the assignment, an independent mental attitude is to be
maintained by the auditor(s).
c. Due professional care is to be exercised in the planning and performance of the
audit and preparation of the report.
d. The work is to be adequately planned and assistants, if any, are to be properly
supervised.

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

auditor most likely would
a. Perform tests of details of transactions and balances.
b. Review prior-year working papers and the permanent file for the client.
c. Read specialized industry journals.
d. Reevaluate client’s internal control environment.

3. Analytical procedures used in planning an audit should focus on

a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential material misstatements will be identified.
c. Enhancing the auditor’s understanding of the client’s business.
d. Assessing the adequacy of the available evidential matter.

4. The extent of planning will vary according to any of the following, except:
a. Size of the audit client.
b. Auditor’s experience with the entity and knowledge of the business.
c. The nature and complexity of the audit engagement
d. The assessed level of control risk.

5. Which of the following factors is inappropriately relevant to the management’s assessment

of the going concern assumption?
a. The degree of uncertainty associated with the outcome of an event or condition
decreases significantly the further into the future of judgment being made about the
outcome of an event or condition.
b. Any judgment about the future is based on information available at the time at which
the judgment is made.
c. The size and complexity of the entity, and the nature and conditions of its business
affect the judgment regarding the outcome of events or conditions.
d. Subsequent events can contradict a judgment which was reasonable at the time it was
made.

6. Prior to the acceptance of an audit engagement with a client who has terminated the
services of the predecessor auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a
complete report of the circumstance leading to the termination with the understanding
that all information disclosed will be kept confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can
include audit procedures to verify the reason given by the client for the termination.
 c. Not communicate with the predecessor auditor because this would in effect be
asking the auditor to violate the confidential relationship between auditor and client.
d. Advise the client of the intention to contact the predecessor auditor and request
permission for the contact.

7. Which of the following should an auditor obtain from the predecessor auditor prior to
accepting an audit engagement?
a. Analysis of balance sheet accounts
b. Analysis of income statement accounts
c. All matters of continuing accounting significance
d. Facts that might bear on the integrity of management

8. If permission from client to discuss its affairs with the proposed auditor is denied by the
client, the predecessor auditor should:
a. Keep silent of the denial.
b. Disclose the fact that the permission to disclose is denied by the client.
c. Disclose adequately to proposed auditor all noncompliance made by the client.
d. Seek legal advice before responding to the proposed auditor

9. Which of the following is least likely included in an audit engagement letter?

a. The objective of financial reporting.
b. Management responsibility for the financial statements.
c. The form of any reports or other communication of the results of the engagement.
d. Arrangement concerning the involvement of other auditors or experts in some aspects
of the audit.

10. Which of the following least likely influence the auditor’s decision to send a separate
engagement letter to a component of parent entity client?
a. Legal requirements
b. Degree of ownership over a component entity by parent company
c. Location of the principal place of business of the component entity
d. Who appoints the auditor of the component

11. Which statement is incorrect regarding the Code of Ethics for Professional Accountants in
the Philippines?
a. Professional accountants refer to persons who are Certified Public Accountants (CPA)
and who hold a valid certificate issued by the Board of Accountancy.
b. Where a national statutory requirement is in conflict with a provision of the IFAC Code,
the IFAC Code requirement prevails.
c. The Code of Ethics for Professional Accountants in the Philippines is mandatory for
all CPAs and is applicable to professional services performed in the Philippines on or
after January 1, 2004.
d. Professional accountants should consider the ethical requirements as the basic
principles which they should follow in performing their work.

12. Financial interest means

a. Any bank account which is used solely for the banking of clients’ monies.
b. Any monies received by a professional accountant in public practice to be held or paid
out on the instruction of the person from whom or on whose behalf they are received.
c. A financial interest beneficially owned through a collective investment vehicle, estate,
trust or other intermediary over which the individual or entity has no control.
d. An interest in an equity or other security, debenture, loan or other debt instrument of
an entity, including rights and obligations to acquire such an interest and derivatives
directly related to such interest.

13. Which of the following is incorrect regarding independence?

a. Independence consists of independence of mind and independence in appearance.
b. Independence of mind is the state of mind that permits the provision of an opinion
without being affected by influences that compromise professional judgment, allowing
an individual to act with integrity, and exercise objectivity and professional skepticism.
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 c. Independence in appearance is the avoidance of facts and circumstances that are so
significant a reasonable and informed third party, having knowledge of all relevant
information, including any safeguards applied, would reasonably conclude a firm's or a
member of the assurance team’s integrity, objectivity or professional skepticism had
been compromised.
d. Independence is a combination of impartiality, intellectual honesty and a freedom from
conflicts of interest.

14. A combination of impartiality, intellectual honesty and a freedom from conflicts of interest.
a. Objectivity
b. Independence of mind
c. Professional skepticism
d. Independence

15. Lead engagement partner is

I. The partner responsible for signing the report on the consolidated financial statement
of the audit client.
II. Where relevant, the partner responsible for signing the report in respect of any entity
whose financial statements form part of the consolidated financial statements and on
which a separate stand-alone report is issued.
III. When no consolidated financial statements are prepared, the partner responsible for
signing the report on the financial statements.

a. I, II and III
b. I and II only
c. I only
d. I and III only

16. The communication to the public of facts about a professional accountant which are not
designed for the deliberate promotion of that professional accountant.
a. Publicity
b. Advertising
c. Indirect promotion
d. Solicitation

17. How did the Code of Ethics define public interest?

a. A distinguishing mark of a profession is acceptance of its responsibility to the public.
b. The accountancy profession's public consists of clients, credit grantors, governments,
employers, employees, investors, the business and financial community, and others
who rely on the objectivity and integrity of professional accountants.
c. The collective well-being of the community of people and institutions the professional
accountant serves.
d. The standards of the accountancy profession are heavily determined by the public
interest.

18. In order to achieve the objectives of the accountancy profession, professional accountants
have to observe a number of prerequisites or fundamental principles. The fundamental
principles include the following, except
a. Objectivity
b. Professional Competence and due Care
c. Technical Standards
d. Confidence

19. Which of the following is incorrect regarding integrity and objectivity?

a. Integrity implies not merely honesty but fair dealing and truthfulness.
b. The principle of objectivity imposes the obligation on all professional accountants to be
fair, intellectually honest and free of conflicts of interest.
c. Professional accountants serve in many different capacities and should demonstrate
their objectivity in varying circumstances.
d. Professional accountants should neither accept nor offer any gifts or entertainment.
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20. Which of the following is incorrect regarding professional competence?
a. Professional accountants may portray themselves as having expertise or experience
they do not possess.
b. Professional competence may be divided into two separate phases.
c. The attainment of professional competence requires initially a high standard of
general education.
d. The maintenance of professional competence requires a continuing awareness of
development in the accountancy profession.

21. Which of the following is incorrect regarding confidentiality?

a. Professional accountants have an obligation to respect the confidentiality of
information about a client’s or employer’s affairs acquired in the course of professional
services.
b. The duty of confidentiality ceases after the end of the relationship between the
professional accountant and the client or employer.
c. Confidentiality should always be observed by a professional accountant unless
specific authority has been given to disclose information or there is a legal or
professional duty to disclose.
d. Confidentiality requires that a professional accountant acquiring information in the
course of performing professional services neither uses nor appear to use that
information for personal advantage or for the advantage of a third party.

22. Not all engagements performed by professional accountants are assurance engagements.
Other engagements frequently performed by professional accountants that are not
assurance engagements include the following, except
a. Agreed-upon procedures
b. Compilation of financial or other information
c. Management consulting
d. Examination of prospective financial information

23. Which of the following least likely create “self-interest threat”?

a. Undue dependence on total fees from an assurance client.
b. Concern about the possibility of losing the engagement.
c. Having a close business relationship with an assurance client.
d. Pressure to reduce inappropriately the extent of work performed in order to reduce
fees.

24. Occurs when a firm, or a member of the assurance team, promotes, or may be perceived
to promote, an assurance client’s position or opinion to the point that objectivity may, or
may be perceived to be, compromised. Such may be the case if a firm or a member of the
assurance team were to subordinate their judgment to that of the client.
a. Self-interest threat
b. Self-review threat
c. Advocacy threat
d. Familiarity threat

25. Safeguards created by the profession, legislation or regulation, include the following,
except
a. Educational, training and experience requirements for entry into the profession.
b. Continuing education requirements.
c. Legislation governing the independence requirements of the firm.
d. Policies and procedures that emphasize the assurance client’s commitment to fair
financial reporting.

26. Which of the following is incorrect regarding engagement period?

a. The period of the engagement starts when the assurance team begins to perform
assurance services and ends when the assurance report is issued, except when the
assurance engagement is of a recurring nature.

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 b. If the assurance engagement is expected to recur, the period of the assurance
engagement ends with the notification by either party that the professional relationship
has terminated or the issuance of the final assurance report, whichever is earlier.
c. In the case of an audit engagement, the engagement period includes the period
covered by the financial statements reported on by the firm.
d. When an entity becomes an audit client during or after the period covered by the
financial statements that the firm will report on, the firm should consider whether any
threats to independence may be created by previous services provided to the audit
client.

27. The following loans and guarantees would not create a threat to independence, except
a. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to the firm, provided the loan is made under normal lending procedures,
terms and requirements and the loan is immaterial to both the firm and the assurance
client.
b. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to a member of the assurance team or their immediate family, provided the
loan is made under normal lending procedures, terms and requirements.
c. Deposits made by, or brokerage accounts of, a firm or a member of the assurance
team with an assurance client that is a bank, broker or similar institution, provided the
deposit or account is held under normal commercial terms.
d. If the firm, or a member of the assurance team, makes a loan to an assurance client,
that is not a bank or similar institution, or guarantees such an assurance client's
borrowing.

28. Examples of close business relationships that may create self-interest and intimidation
threat least likely include
a. Having a material financial interest in a joint venture with the assurance client or a
controlling owner, director, officer or other individual who performs senior managerial
functions for that client.
b. Arrangements to combine one or more services or products of the firm with one or
more services or products of the assurance client and to market the package with
reference to both parties.
c. Distribution or marketing arrangements under which the firm acts as a distributor or
marketer of the assurance client’s products or services, or the assurance client acts as
the distributor or marketer of the products or services of the firm.
d. The purchase of goods and services from an assurance client by the firm (or from an
audit client by a network firm) or a member of the assurance team, provided the
transaction is in the normal course of business and on an arm’s length basis.

29. If a member of the assurance team, partner or former partner of the firm has joined the
assurance client, the significance of the self-interest, familiarity or intimidation threats
created is least likely affected by
a. The position the individual has taken at the assurance client.
b. The amount of any involvement the individual will have with the assurance team.
c. The length of time that the individual was a member of the assurance team or firm.
d. The former position of the individual within the assurance team or firm.

30. The partner may continue to serve as the lead engagement partner before rotating off the
engagement for how many years after audit client becomes a listed entity?
a. One year
b. Two years
c. Three years
d. Four years

31. Which of the following is not likely to create a threat to independence?

a. The total fees generated by an assurance client represent a large proportion of a firm’s
total fees.
b. Fees due from an assurance client for professional services remain unpaid for a long
time.
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 c. A firm obtains an assurance engagement at a significantly lower fee level than that
charged by the predecessor firm, or quoted by other firms.
d. A court or other public authority established fees.

32. Which of the following actions by a professional accountant in public practice will not result
in violation of the Code of Ethics regarding commissions?
a. Accepting commission for referring a client to a third party.
b. Accepting commission for the referral of the products or services of others.
c. Receipt of referral fees by the referring accountant when no services are performed
by the referring accountant.
d. Entering into an arrangement for the purchase of the whole or part of an accounting
practice requiring payments to individuals formerly engaged in the practice or
payments to their heirs or estates.

33. Which of the following is true regarding advertising and solicitation?

a. Advertising, but not solicitation, by individual professional accountants in public
practice is permitted in the Philippines.
b. It is clearly desirable that the public should be aware of the range of services available
from a professional accountant.
c. Solicitation, but not advertising, by individual professional accountants in public
practice is permitted in the Philippines.
d. A professional accountant in public practice in the Philippines, where advertising is
prohibited, may advertise in a newspaper or magazine published in a country where
advertising is permitted.

34. Which of the following is acceptable?

a. A professional accountant invited a potential client to attend training courses or
seminars conducted for the assistance of staff.
b. Job specification that gives some detail as to one or more of the services provided to
clients by the professional accountant in public practice was communicated to the
public through the classified ads section of a newspaper.
c. A professional accountant in public practice indicated in his stationery that he is a tax
expert.
d. A professional accountant developed a website that contains self-laudatory statements
designed to solicit clients.

35. A person is not deemed to be engaged in professional accounting practice if

a. Her merely holds himself out as skilled in the science and practice of accounting and
qualified to render services as a CPA.
b. He merely offers to render services as a CPA to the public, but does not actually
render such services.
c. He offers or renders bookkeeping services to more than one client.
d. He installs and revises accounting systems for more than one client.

36. 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 (choose the incorrect
one)
a. That the business or company where the above position exists has a paid-up capital of
at least P5,000,000 and/or an annual revenue of at least P10,000,000.
b. The above provision shall apply only to persons to be employed after the effectivity of
the Implementing Rules and Regulations of RA 9298.
c. The above provision shall not result to deprivation of the employment of incumbents
to the position.
d. None of the above.

37. The following statements relate to CPA examination ratings. Which of the following is
incorrect?

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 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. Candidates who failed in four complete examinations shall no longer be allowed to
take the examinations the fifth time.
d. Conditioned candidates shall take an examination in the remaining subjects within two
years from the preceding examination.

38. A meaningful experience shall be considered as satisfactory compliance with the

requirements of Section 28 of RA 9298 if it is earned in (Choose the incorrect one)
a. Commerce and industry and shall include significant involvement in general
accounting, budgeting, tax administration, internal auditing, liaison with external
auditors, representing his/her employer before government agencies on tax and
matters related to accounting or any other related functions.
b. Academe/education and shall include teaching for at least three (3) trimesters or two
(2) semesters subjects in either financial accounting, business law and tax, auditing
problems, auditing theory, financial management and management services.
c. Government and shall include significant involvement in general accounting,
budgeting, tax administration, internal auditing, liaison with the Commission on Audit or
any other related functions.
d. Public practice and shall include at least two years as audit assistant and at least one
year as auditor in charge of audit engagement covering full audit functions of
significant clients.

39. Any person who shall violate any of the provisions of RA 9298 or any of its implementing
rules and regulations as promulgated by the Board subject to the approval of the
Commission, shall, upon conviction, be punished by
a. A fine of not less than fifty thousand pesos (P 50,000.00) or by imprisonment for a
period not exceeding two (2) years or both.
b. A fine of not less than one hundred thousand pesos (P 100,000.00) or by
imprisonment for a period not exceeding two (2) years or both.
c. A fine of not less than fifty thousand pesos (P 50,000.00) or by imprisonment for a
period not exceeding three (3) years or both.
d. A fine of not less than one hundred thousand pesos (P 100,000.00) or by
imprisonment for a period not exceeding three (3) years or both.

40. Below are the names of three CPA firms and pertinent facts relative to each firm. Unless
otherwise indicated, the individuals named are CPAs and partners, and there are no other
partners. Which firm name and related facts indicates a violation of the IRR of RA 9298?
a. Joyce, Ara and Angela, CPAs (Joyce died about 10 years ago, Ara and Angela are
continuing the firm)
b. Lupin and Fujico, CPAs ( the name of Goymon a third active partner is omitted in the
firm name)
c. Hugo and Pugo, CPAs (Hugo died 25 months ago, Pugo is continuing the firm as a
sole proprietor)
d. Bubu and Bibi, CPAs (Bibi died 3 years ago, Bobot was admitted into the partnership 2
months after Bibi’s death.)

41. The auditor’s opinion

a. Enhances the credibility of the financial statements.
b. Is an assurance as to the future viability of the entity.
c. Is an assurance as to the efficiency with which management has conducted the
affairs of the entity, but not effectiveness.
d. Certifies the correctness of the financial statements.

42. The objective of a review of financial statements

a. Is to enable the auditor to express an opinion whether the financial statements are
prepared, in all material respects, in accordance with an identified financial reporting
framework.
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 b. Is to enable an auditor to state whether, on the basis of procedures which do not
provide all the evidence that would be required in an audit, anything has come to the
auditor’s attention that causes the auditor to believe that the financial statements are
not prepared, in all material respects, in accordance with an identified financial
reporting framework.
c. Is to carry out those procedures of an audit nature to which the auditor and the entity
and any appropriate third parties have agreed and to report on factual findings.
d. Is to use accounting expertise as opposed to auditing expertise to collect, classify and
summarize financial information.

43. The Framework of PSA applies to

a. Taxation
b. Consultancy
c. Accounting advice
d. Compilation

44. The decision as to whether the criteria are suitable involves considering whether the
subject matter is capable of reasonably consistent evaluation against or measurement
using such criteria. The characteristics for determining whether criteria are suitable include
the following, except
a. Relevance
b. Reliability
c. Understandability
d. Sufficiency

45. Which of the following types of audits is performed to determine whether an entity’s
financial statements are fairly stated in conformity with generally accepted accounting
principles?
a. Operational audit
b. Compliance audit
c. Financial statement audit
d. Performance audit

46. In “auditing” accounting data, the 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.

47. Which of the following statements is not a distinction between independent auditing and
internal auditing?
a. Independent auditors represent third party users external to the auditee entity,
whereas internal auditors report directly to management.
b. Although independent auditors strive for both validity and relevance of evidence,
internal auditors are concerned almost exclusively with validity.
c. Internal auditors are employees of the auditee, whereas independent auditors are
independent contractors.
d. The internal auditor's span of coverage goes beyond financial auditing to encompass
operational and performance auditing.

48. Which of the following best describes why an independent auditor reports on financial
statements?
a. Independent auditors are likely to detect fraud
b. Competing interests may exist between management and the users of the statements
c. Misstated account balances are generally corrected by an independent audit.
d. Ineffective internal controls may exist.

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49. Which of the following least likely limits the auditors ability to detect material
misstatement?
a. Most audit evidences are conclusive rather than being persuasive.
b. The inherent limitations of any accounting and internal control system.
c. Audit is based on testing
d. Audit procedures that are effective in detecting ordinary misstatements are ineffective
in detecting intentional misstatements.

50. The best statement of the responsibility of the auditor with respect to audited financial
statement is:
a. The audit of the financial statements relieves management of its responsibilities
b. The auditor’s responsibility is confined to his expression of opinion about the audited
financial statements.
c. The responsibility over the financial statements rests with the management and the
auditor assumes responsibility with respect to the notes of financial statements.
d. The auditor is responsible only to his unqualified opinion but not for any other type of
opinion.

51. Independent auditing can best be described as a

a. Branch of accounting
b. Discipline that attests to the results of accounting and other operations and data
c. Professional activity that measures and communicates financial and business data
d. Regulatory function that prevents the issuance of improper financial information

52. An operational audit is designed to

a. Assess the efficiency and effectiveness of management’s operating procedures
b. Assess the presentation of management’s financial statements in accordance with
generally accepted accounting principles
c. Determine whether management has complied with applicable laws and regulations
d. Determine whether the audit committee of the board of directors is effectively
discharging its responsibility to oversee management’s operations

53. Assurance engagement

a. Is an engagement in which a practitioner is engaged to issue, or does issue, a written
communication that expresses a conclusion about the reliability of a written assertion
that is the responsibility of another party.
b. Is a systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and communicating
the results to interested users.
c. Is an engagement in which the auditor provides a moderate level of assurance that
the information subject to the engagement is free of material misstatement.
d. Is an engagement intended to enhance the credibility of information about a subject
matter by evaluating whether the subject matter conforms in all material respects with
suitable criteria, thereby improving the likelihood that the information will meet the
needs of an intended user.

54. According to Philippine Standard on Auditing, the procedures employed in doing

compilation are:
a. Designed to enable the accountant to express a limited assurance.
b. Designed to enable the accountant to express a negative assurance.
c. Not designed to enable the accountant to express any form of assurance.
d. Less extensive than review procedures but more extensive than agreed-upon
procedures.

55. The term “fraud” refers to an intentional act by one or more individuals among
management, those charged with governance, employees, or third parties, involving the
use of deception to obtain an unjust or illegal advantage. Which statement is correct
regarding fraud?
a. Auditors make legal determinations of whether fraud has actually occurred.
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 b. Misstatement of the financial statements may not be the objective of some frauds.
c. Fraud involving one or more members of management or those charged with
governance is referred to as “employee fraud”.
d. Fraud involving only employees of the entity is referred to as “management fraud”.

56. When an auditor becomes aware of a possible illegal act by a client, the auditor should
obtain an understanding of the nature of the act to
a. Increase the assessed level of control risk.
b. Recommend remedial actions to the audit committee.
c. Evaluate the effect on the financial statements.
d. Determine the reliability of management’s representations.

57. If an auditor believes a client may have committed illegal acts, which of the following
actions should the auditor take?
a. Consult with the client’s counsel and the auditor’s counsel to determine how the
suspected illegal acts will be communicated to stockholders.
b. Extend auditing procedures to determine whether the suspected illegal acts have a
material effect on the financial statements.
c. Make inquiries of the client’s management and obtain an understanding of the
circumstances underlying the acts and of other evidence to determine the effects of
the acts on the financial statements.
d. Notify each member of the audit committee of the board of directors about the nature
of the acts and request that they advise an approach to be taken by the auditor.

58. Which statement is incorrect regarding the auditor’s communications of audit matters with
those charged with governance?
a. The auditor should communicate audit matters of governance interest arising from the
audit of financial statements with those charged with governance of an entity.
b. Those charged with governance ordinarily are accountable for ensuring that the entity
achieves its objectives, financial reporting, and reporting to interested parties.
c. “Audit matters of governance interest” are those that arise from the audit of financial
statements and, in the opinion of the auditor, are either important or relevant to those
charged with governance in overseeing the financial reporting and disclosure process.
d. Audit matters of governance interest include only those matters that have come to the
attention of the auditor as a result of the performance of the audit.

59. The role of persons entrusted with the supervision, control and direction of an entity
a. Governance
b. Board of directors
c. Government
d. Management

60. The form of communication with a client in a management advisory service consultation
should be
a. Either oral or written.
b. Oral with appropriate documentation in the work papers.
c. Written and copies should be sent to both management and the board of directors.
d. Written and a copy should be sent to management alone.

61. In connection with the element of professional development, a CPA firm’s system of
quality control should ordinarily provide that all personnel
a. Have the knowledge required to enable them to fulfill responsibilities assigned.
b. Possess judgment, motivation, and adequate experience.
c. Seek assistance from persons having appropriate levels of knowledge, judgment,
and authority.
d. Demonstrate compliance with peer review directives.

62. A CPA firm’s personnel partner periodically studies the CPA firm’s personnel
advancement experience to ascertain whether individuals meeting stated criteria are

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 assigned increased degrees of responsibility. This is evidence of the CPA firm’s
adherence to prescribed standards of
a. Quality control
b. Due professional care
c. Supervision and review
d. Fieldwork.

63. Monitoring, as an element of quality control policies of a firm, requires:

a. Providing reasonable assurance that the firm’s other quality control policies and
procedures are effectively operating.
b. Designates individuals as specialists to serve as authoritative sources and define their
authority in consultative situations.
c. Ensuring that personnel are sufficiently directed, supervised and their work being
reviewed adequately.
d. Identify the right personnel to be assigned in an audit engagement.

64. What is the overriding reason why the auditor considers the professional competence of
assistants whom the work will be delegated?
a. All the audit assistants assigned to an engagement must be independent in
appearance.
b. To have reasonable assurance that such work will be performed with due care by the
audit assistant.
c. To lessen the working paper preparation.
d. To eliminate audit risk.

65. Competence as a certified public accountant includes all of the following except
a. Having the technical qualifications to perform an engagement.
b. Possessing the ability to supervise and evaluate the quality of staff work.
c. Warranting the infallibility of the work performed.
d. Consulting others if additional technical information is needed.

66. 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.

67. Which of the following is an incorrect statement?

a. Detection risk cannot be changed at the auditor’s discretion.
b. If individual audit risk remains the same, detection risk bears an inverse relationship to
inherent and control risks.
c. The greater the inherent and control risks the auditor believes exists, the less
detection risk that can be accepted.
d. The auditor might make separate or combined assessments of inherent risk and
control risk.

68. Which of the following statements is true?

a. If control risk is assessed at maximum, the nature of related substantive tests should
be changed from more to less effective.
b. If control risk is assessed at maximum, the nature of related substantive tests should
be changed from less to more effective.
c. If control risk is assessed at maximum, the timing of related substantive tests should
be changed from year-end to an interim date.
d. If control risk is assessed at maximum, the extent of related substantive tests should
be changed from a larger to a smaller sample.

69. Which statement is incorrect regarding obtaining an understanding of the entity and its
environment?
a. Obtaining an understanding of the entity and its environment is an essential aspect of
performing an audit in accordance with PSAs.
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 b. That understanding establishes a frame of reference within which the auditor plans the
audit and exercises professional judgment about assessing risks of material
misstatement of the financial statements and responding to those risks throughout the
audit.
c. The auditor’s primary consideration is whether the understanding that has been
obtained is sufficient to assess the risks of material misstatement of the financial
statements and to design and perform further audit procedures.
d. The depth of the overall understanding that is required by the auditor in performing the
audit is equal to that possessed by management in managing the entity.

70. The main purpose of risk assessment procedures is to

a. Obtain an understanding of the entity and its environment, including its internal control,
to assess the risks of material misstatement at the financial statement and assertion
levels.
b. Test the operating effectiveness of controls in preventing, or detecting and correcting,
material misstatements at the assertion level.
c. Detect material misstatements at the assertion level.
d. All of the above.

71. Inherent risk and control risk differ from detection risk in that inherent risk and control risk
are
a. Elements of audit risk while detection risk is not.
b. Changed at the auditor’s discretion while detection risk is not.
c. Considered at the individual account-balance level while detection risk is not.
d. Functions of the client and its environment while detection risk is not.

72. An audit of financial statements is conducted to determine if the

a. Organization is operating efficiently and effectively

b. Auditee is following specific procedures or rules set down by some higher authority
c. Overall financial statements are stated in accordance with the applicable financial
reporting framework
d. Client’s internal control is functioning as intended

73. After considering a client's internal control, an auditor has concluded that the system is
well designed and is functioning as anticipated. Under these circumstances, the auditor
would most likely
a. Cease to perform further substantive test
b. Not increase the extent of planned substantive tests.
c. Increase the extent of anticipated analytical procedures.
d. Perform all tests of controls to the extent outlined in the preplanned audit program.

74. The auditor is examining copies of sales invoices only for the initials of the person
responsible for checking the extensions. This is an example of a
a. Test of controls.
b. Substantive test.
c. Dual-purpose test.
d. Test of balances.

75. The sequence of steps in gathering evidence as the basis of the auditor's opinion is:
a. Substantive tests, documentation of control structure, and tests of controls.
b. Documentation of control structure, substantive tests, and tests of controls.
c. Documentation of control structure, tests of controls, and substantive tests.
d. Tests of controls, documentation of control structure, and substantive tests

76. Which of the following is NOT among the conditions that give rise to a demand by external
users for independent audits of financial statements?
a. Remoteness of users
b. Complexity of making economic decisions
c. Potential conflict of interest between users and preparers of the statements
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 d. Consequence of making decisions

77. Which of the following best describes the reason why an independent auditor reports on
financial statements?
a. A management fraud may exist and it is more likely to be detected by independent
auditors.
b. Different interests may exist between the company preparing the statements and the
persons using the statements.
c. A misstatement of account balances may exist and is generally corrected as the
result of the independent auditor’s work.
d. A poorly designed internal control system may be in existence.

78. When setting a preliminary judgment about materiality:

a. more evidence is required for a low dollar amount than for a high dollar amount.
b. less evidence is required for a low dollar amount than for a high dollar amount.
c. the same amount of evidence is required for either low or high dollar amounts
d. there is no relationship between it and the dollar amount of evidence needed

79. The risk of material misstatement refers to:

a. control risk and acceptable audit risk
b. inherent risk.
c. the combination of inherent risk and control risk.
d. inherent risk and audit risk.

80. Which of the following statements about independent financial statement audit is
INCORRECT?
a. The term “scope of the audit” refers to audit procedures deemed necessary in the
circumstances to achieve the objective of the audit.
b. The auditor’s opinion enhances the credibility of the financial statements.
c. The phrase used to express the auditor’s opinion is “present fairly, in all material
respects”.
d. The risk that the auditor will fail to uncover material misstatement is eliminated when
the auditor conducts the audit in accordance with PSAs.

81. Which of the following statements best describes assurance services?

a. Independent professional services that are intended to enhance the credibility of
information to meet the needs of an intended user.
b. Services designed to express an opinion on the fairness of historical financial
statements based on the results of an audit.
c. The preparation of financial statements or the collection, classification, and
summarization of other financial information.
d. Services designed for the improvement of operations, resulting in better outcomes.

82. Which of the following is not a likely procedure to support the operating effectiveness of
internal controls?
a. Inquiry of client personnel.
b. Observation of control-related activities.
c. Reperformance of client procedures.
d. Completing an internal control questionnaire.

83. Which of the following is not one of the subcomponents of the control environment?
a. Management’s philosophy and operating style.
b. Organizational structure.
c. Adequate separation of duties.
d. Commitment to competence.

84. When considering internal control, an auditor should be aware of the concept of
reasonable assurance, which recognizes that the:
a. segregation of incompatible functions is necessary to ascertain that internal control is
effective.
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 b. employment of competent personnel provides assurance that the objectives of internal
control will be achieved.
c. establishment and maintenance of internal control is an important responsibility of
the management and not of the auditor.
d. costs of internal control should not exceed the benefits expected to be derived from
internal control.

85. Which of the following terms best describes the audit of a taxpayer’s return by a BIR
auditor?
a. Operational audit
b. Internal audit
c. Compliance audit
d. Government audit

86. The independent auditor should acquire an understanding of the internal audit function as
it relates to the independent auditor’s study and evaluation of internal control because the:
a. audit programs, working papers, and reports of internal auditors can often be used as
a substitute for the work of the independent auditor’s staff.
b. procedures performed by the internal audit staff may eliminate the independent
auditor’s need for an extensive study and evaluation of internal control.
c. work performed by internal auditors may be a factor in determining the nature,
timing, and extent of the independent auditor’s procedures.
d. understanding of the internal audit function is an important substantive test to be
performed by the independent auditor.

87. Internal controls normally include procedures designed to provide reasonable assurance
that:
a. employees act with integrity when performing their assigned tasks.
b. transactions are executed in accordance with management’s authorization
c. decision processes leading to management’s authorization of transactions are
sound.
d. collusive activities would be detected by segregation of employee duties.

88. The auditor's analytical procedures will be facilitated if the client

a. Uses a standard cost system that produces variance reports.
b. Segregates obsolete inventory before the physical inventory count
c. Corrects material weaknesses in internal control before the beginning of the audit.
d. Reduces inventory balances to the lower of cost or market.

89. An auditor evaluates the existing internal control in order to

a. Determine the extent of substantive tests which must be performed.
b. Determine the extent of control tests which must be performed.
c. Ascertain whether irregularities are probable.
d. Ascertain whether any employees have incompatible functions.

90. Flowcharting as a means of internal control evaluation provides the following advantage
over the use of questionnaires and descriptive narratives:
a. Ease of preparation.
b. Comprehensive coverage of controls.
c. Simplicity.
d. Ease in following information flow.

91. If the independent auditors decide that the work performed by the internal auditor may
have a bearing on their own procedures, they should consider the internal auditor's
a. Competence and objectivity.
b. Efficiency and experience.
c. Independence and review skills.
d. Training and supervisory skills.

92. In assessing control risk, the auditor must, as a minimum

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 a. Perform tests of all significant controls.
b. Obtain an understanding of the design and implementation of the client's internal
control.
c. Obtain an understanding of the design of the client's internal control.
d. Obtain an understanding of the design, implementation, and operating effectiveness of
the client's internal control.

93. Which of the following is not an auditing procedure that is commonly used in performing
control tests?
a. Inquiring.
b. Observing.
c. Confirming.
d. Inspecting.

94. The auditor's judgment concerning the overall fairness of the presentation of financial
position, results of operations, and changes in financial position is applied within the
framework of
a. Generally accepted accounting principles.
b. Generally accepted auditing standards.
c. Internal control.
d. Information systems control.

95. To maximize independence, the director of internal auditing should report to the
a. Audit committee.
b. Controller.
c. Chief financial officer.
d. Director of information systems.

96. The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth
in the
a. Scope paragraph of the auditor’s report
b. Opinion paragraph of the auditor’s report.
c. Management letter.
d. Engagement letter.

97. The four major steps in conducting an audit are:

a. Testing internal controls
b. Audit report
c. Planning
d. Testing transactions and balances

The proper sequence in applying the above steps is:

a. cadb
b. cdab
c. bcda
d. adcb

98. Which of the following statements is not true regarding the competence of audit evidence?
a. Relevance is enhanced by an effective information system.
b. To be competent, evidence must be both valid and relevant.
c. Validity is related to the quality of the client’s information system.
d. Relevance must always relate to audit objectives.

99. As used in auditing, which of the following statements best describes "assertions"?
a. Assertions are the representations of management as to the reliability of the
information system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial
statements.

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 d. Assertions are found only in the footnotes to the financial statements.

100. Which of the following best describes the purpose of the engagement letter?
a. The engagement letter relieves the auditor of some responsibility for the exercise of
due care.
b. By clearly defining the nature of the engagement, the engagement letter helps to avoid
and resolve misunderstandings between CPA and client regarding the precise nature
of the work to be performed and the type of report to be issued.
c. The engagement letter conveys to management the detailed steps to be applied in
the audit process.
d. The engagement letter should be signed by both the client and the CPA and should be
used only for independent audits.

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