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 Compliance Economy 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?
Contro Detection Inherent Contro Detection Inherent
l risk risk risk l risk risk risk
a. Yes Yes No c. Yes Yes Yes
b Yes No Yes d. No Yes Yes
.

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 No Ye Ye
s s s
To monitor the conditions affecting the
practice of accountancy
Ye Ye No Ye
s s s
To conduct an oversight into the quality
of audits of financial statements
 Ye No Ye No
s s

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 requires FS The auditor’s report

disclosure but no should be modified
The FS should be adjustment for a lack of
adjusted 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