AUDITING THEORY MCQ BY SALOSAGCOL

CHAPTER 1
1. Broadly defined, the subject matter of any audit consist of
a. Financial statements
b. Economic data
c. Assertions
d. Operating data

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

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

3. Most of the independent auditor’s work in formulating an opinion on

financial statement consist of
a. Studying and evaluating internal control
b. Obtaining and examining evidential matter
c. Examining cash transaction
d. Comparing recorded accountability with assets

4. In financial statement audits, the audit process should be conducted

in accordance with
a. The audit program
b. Philippine standard on auditing
c. Philippine accounting standards
d. Philippine Financial Reporting Standards

5. Which of the following best describe the operational audit?

a. It requires the constant review by internal auditors of the
administrative controls as they relate to operations of the company.
b. It concentrates on implementing financial and accounting control in a
newly organized company.
c. In attempts and is designed to verify the fair presentation of a
company’s results of operations.
d. It concentrates on seeking out aspects of operations in which waste would
be reduced by the introduction of controls.

6. The auditor communicates the results of his or her work through the medium
if the
a. Engagement letter
b. Audit report
c. Management letter
d. Financial statement

7. Which of the following types of auditing is performed most commonly by

CPA’s on a contractual basis?
a. Internal Auditing
 b. Income tax auditing
c. Government auditing
d. External auditing

8. Independent auditing can best be describe as a

a. Professional activity that measures and communicates
financial accounting data
b. subset accounting
c. Professional activity that attest to the fair presentation of
financial statement
d. Regulatory activity that prevents the issuance of improper financial
information

9. Which of the following statements is not a distinction between

independent auditors and internal auditors?
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.

10.Which of the following has the primary responsibility for the fairness of
the representations made in the financial statements?
a. Client’s management
b. Audit Committee
c. Independent auditor
d. Board of Accountancy

11.An audit of the financial statements of KIA Corporation is being conducted by

an external auditor. The external auditor is expected to
a. express an opinion as to the fairness of KIA’s financial statements.
b. express an opinion as to the attractiveness of KIA for
investment purposes.
c. certify the correctness of KIA’s Financial Statements.
d. examine all evidence supporting KIA’s financial statements.

12.Which of the following statements about independent financial statements

audit is correct?
a. The audit of financial statements relieves management of its
responsibilities for the financial statement
b. An audit is designed to provide limited assurance that the
financial statements taken as a whole are free from material
misstatement
c. The procedures required to conduct an audit in accordance with PSAs
should be determined by the client who engaged the services of the
auditor.
 d. The auditor’s opinion is not an assurance as to the future viability of the
entity as well as the effectiveness and efficiency with which
management has conducted the affairs of the entity.

13.The reason an independent auditor gathers evidence is to

a. Form an opinion on the financial statements
b. Detect fraud
c. Evaluate management
d. Evaluate internal controls

14.An attitude that includes a questioning mind and critical assessment of

audit evidence is referred to as
a. Due professional care
b. Professional skepticism
c. Reasonable assurance
d. Supervision

15.Jack has been retained as auditor of EVC Company. The function of Jack’s
opinion on financial statements of EVC Company is to
a. Improve financial decisions of company management
b. Lend Credibility to management’s representation
c. Detect fraud and abuse in management operations
d. Serve requirements of BIR, SEC, or Central Bank

16.Which of the following is not one of the limitations of an audit?

a. The use of testing
b. Limitations imposed by client
c. Human error
d. Nature of evidence that the auditor obtains

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

an audit?
a. Many audit conclusions are made on the basis of examining a sample of
evidence.
b. Some evidence supporting peso representation in the financial
statement must be obtained by oral or written representation of
management.
c. Fatigue can cause auditors to overlook pertinent evidence.
d. Many financial statement assertions cannot be audited.

18.Which of the following is not one of the general principles governing

the audit of financial statements?
a. The auditor should plan and perform the audit with an attitude of
professional skepticism.
b. The auditor should obtain sufficient appropriate evidence
primarily through inquiry and analytical procedure to be able
to draw reasonable conclusions.
c. The auditor should conduct the audit in accordance with PSA.
d. The auditor should comply with the Philippine Code of
Professional Ethics.
19.Which of the following statements does not describe a condition that creates
a demand for auditing?
a. Conflict between an information preparer and a user can result in biased
information.
b. Information can have substantial economic consequence for a
decision- maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.

20.Which of the following statements does not properly describe an element

of theoretical framework of auditing?
a. The data to be audited can be verified.
b. Short-term conflicts may exist between mangers who prepare the
data and auditors who examine the data.
c. Auditors act on behalf of the management.
d. An audit benefits the public

CHAPTER 2
1. An intentional act by one more individuals among management, employees,
or third parties which results in misrepresentation of financial statement
refers to
a. Error
b. Noncompliance
c. Fraud
d. Illegal acts

2. The responsibility for the detection and prevention of errors, fraud

and noncompliance with laws and regulations rests with
a. Auditor
b. Client’s legal counsel
c. Fraud
d. Illegal acts

3. The auditor’s best defense when material misstatements in the

financial statements are not uncovered in the audit is that
a. The audit was conducted in accordance with generally accepted
accounting principles
b. Client is guilty of contributory negligence
c. The audit was conducted in accordance with PSAs
d. Issuing a representation letter to the auditor

4. The following statements relate to the auditor’s responsibility for the detection
of errors and fraud. Identify the correct statements.
I. Due to the inherent limitation of the audit, there is a possibility
that material misstatements in the financial statements may
not be detected.
II. The subsequent discovery of material misstatement of the
financial information resulting from fraud or error does not, in
itself, indicate that the auditor failed to follow the basic
principles and essential procedures of an audit.
a. I only
b. Both Statements are true
c. II only
d. Both statements are false

5. What primarily differentiates fraud from an error

a. Materiality
b. Effect on misstatements
c. Intent
d. Frequency of occurrence

6. The term “error” refers to unintentional misrepresentation of

financial information. Examples of errors are when
I. Assets have been misappropriated
II. Transactions without substance have been recorded
III. Records and documents have been manipulated and falsified
IV. The effects of the transaction have been omitted from
the records
 a. all of the above statements are true
b. only statements I and III are true
c. all of the above statements are false
d. only statement II and IV are true

7. Which of the following best identifies the two types of fraud?

a. Theft of assets and employee fraud.
b. Misappropriation of asset and defalcation.
c. Management fraud and employee fraud.
d. Fraudulent financial reporting and management fraud.

8. Which of the following statements best describe an auditor’s

responsibility to detect errors and fraud?
a. An auditor should assess the risk that errors and fraud may cause
the financial statements to contain material misstatements and
should design the audit to provide reasonable assurance of
detecting errors and fraud that are material to the financial
statements.
b. An auditor is responsible to detect material errors, but has no
responsibility to detect material fraud that are concealed through
employee collusion or management override of the internal control
structure.
c. An auditor has no responsibility to detect errors and fraud unless
analytical procedures or tests of transactions identify conditions
causing a reasonably prudent auditor to suspect that the financial
statements were materially misstated.
d. An auditor has no responsibility to detect errors and fraud because
an auditor is not an insurer and an audit does not constitute a
guarantee.
9. “The auditor would ordinarily expect to find evidence to support
management representations and not assume that they necessarily
correct”.
This is an example of
a. Unprofessional behavior
b. An attitude of professional skepticism
c. Due diligence
d. A rule in code of professional conduct.

10. Which of the following statement is true?

a. It is usually easier for the auditor to uncover fraud than errors.
b. It is usually easier for the auditor to uncover errors than fraud.
c. It is usually equally difficult for the auditor to uncover errors or
errors. fraud.
d. Usually, the auditor does not design procedures to uncover fraud or

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

a. The over recording of transaction
 b. The non-recording of transactions
c. Recorded transactions in subsidiaries
d. Related party receivable
12. If an auditor was engaged to discover errors or fraud and the auditor
performed extensive detail work, which of the following could the auditor
be expected to detect?
a. Misposting if recorded transactions
b. Unrecorded transaction
c. Counterfeit signatures on paid checks
d. Collusive fraud
13. Which of the following statements is incorrect?
a. The responsibility for the prevention and detection of fraud
and error rests with management.
b. The auditor is not and cannot be held responsible for the detection
of fraud or error.
c. In planning an audit, the auditor should assess the risk that fraud
or error may cause the financial statements to contain material
misstatement.
d. The risk of not detecting material fraud is higher than the risk of not
detecting a material misstatement arising from error.
14. Which of the following statement about fraud or error is incorrect?
a. The auditor is not and cannot be held responsible for the
prevention of fraud and error.
b. The responsibility for the prevention and detection of fraud and
error rests with management.
c. The auditor should plan and perform the audit with an attitude of
professional skepticism, recognizing that conditions or events
may be found that fraud or error may exist.
d. The likelihood of detecting fraud is ordinarily higher than that of
detecting error.
15. Which of the following is not an assurance that the auditors give to
the parties who rely on the financial statements?
a. Auditors know how the amounts and disclosures in the
financial statements were produced.
b. Auditor’s give assurance that the financial statements are accurate.
c. Auditors gathered enough evidence to provide a reasonable
basis for forming an opinion.
d. If the evidence allows the auditors to do so, auditors give assurance
in the form of opinion, as to whether the financial statements as a
whole are fairly presented in conformity with GAAP.
16. Which of the following is most likely to be presumed to represent
fraud risk on an audit?
 a. Capitalization of repairs and maintenance into the property,
plant and equipment asset account.
b. Improper revenue recognition
c. Improper interest expense accrual
d. Introduction of significant new products

17. Which of the following conditions or events would least likely increase
risk of fraud or error?
a. Questions with respect to competence or integrity of management
b. Unusual pressures within the entity
c. Unusual transactions
d. Lack of transaction trail

18. Which of the following would be least likely to suggest to an auditor

that the client’s financial statement are materially misstated?
a. There are numerous delays in preparing timely internal
financial reports.
b. Management does not correct internal control structure weaknesses
that it knows about.
c. Differences are reflected in the customer’s confirmation replies.
d. There have nee two new controllers this year.

19. Which of the following circumstances would least likely cause auditor
to consider whether a material misstatement exists?
a. The turnover of senior accounting personnel exceptionally low.
b. Management places substantial emphasis on meeting,
earning projections.
c. There are significant unusual transactions near year-end.
d. Operating and financing decisions are dominated by one person.
20. Which of the following conditions would not normally cause the auditor
to question whether material errors or possible fraud exists?
a. The accounting department is overstaffed.
b. Differences exist between control accounts and
supporting subsidiary records.
c. Transactions are not supported by proper documentation.
d. There are frequent changes of auditors lawyers.
CHAPTER 3:

1. The primary responsibility for establishing and maintaining an internal control

rests with
a. The external auditors
b. The internal auditors
c. Management and those charged with governance
d. The controller or the treasurer

2. The fundamental purpose of an internal control is to

a. Safeguard the resources of the organization
b. Provide reasonable assurance that the objectives of the organization are
achieved
c. Encourage compliance with organization objectives
d. Ensure the accuracy, reliability and timeliness of information

3. Which of the following is not one of the three primary objectives of effective
internal control?
a. Reliability of financial reporting
b. Efficiency and effectiveness of operations
c. Compliance with laws and regulations
d. Assurance of elimination of business risk.

4. Which of the following internal control objectives would be most relevant to the
audit?
a. Operational objective
b. Compliance objective
c. Financial reporting objective
d. Administrative control objective

5. An act of two or more employee to steal assets and cover their theft by
misstating the accounting records would be referred to as:
a. Collusion
b. A material weakness
c. A control deficiency
d. A significant deficiency

6. Which of the following is not one of the components of an entity’s internal

control?
a. Control risk
b. Control activities
c. Information and communication
d. The control environment

7. The overall attitude and awareness of an entity’s board of director concerning

the importance of the internal control usually is reflected in its
a. Computer-based controls
b. System of segregation of duties
c. Control environment
d. Safeguard over access of assets
8. In evaluating the design of the entity’s internal control environment, the auditor
considers the certain subcomponents of control environment and how they have
been incorporated into the entity’s processes. Subcomponents of control
environment would include
a. Integrity and ethical values
b. Commitment to competence
c. Organizational structure
d. Information and communications systems

9. Which of the following components of an entity’s internal control structure

includes the development of employee promotion and training policies?
a. Control activities
b. Control environment
c. Information and communication
d. Quality control system

10. Which of the following subcomponents of the control environment define the
existing lines of responsibility and authority?
a. Organizational structure
b. Management philosophy and operating style
c. Human resource policies and practices
d. Management integrity and ethical values

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

12. Which of the following deal with ongoing or periodic assessment of quality of
internal control by management?
a. Quality control activities
b. Monitoring activities
c. Oversight activities
d. Management activities

13. The policies and procedures that help ensure that management directives are
carried out are referred to as the:
a. Control environment
b. Control activities
c. Monitoring of controls
d. Information systems

14. Which of the following is not one of the specific control activities that are
relevant to financial statement audit?
a. Performance reviews
b. Physical controls
 c. Segregation of duties
d. Monitoring

15. Proper segregation of functional responsibilities in an effective structure of

internal control calls for separation of functions of
a. Authorization, execution, and payment
b. Authorization, recording, and custody
c. Custody, execution, and reporting
d. Authorization, payment, and recording

16. Which of the following best describes the purpose of the control activities?
a. The actions, policies and procedures that reflect the overall attitudes of
the management
b. The identification and analysis of risks and relevant to the preparation of
the financial statements
c. The policies and procedures that help ensure that necessary actions are
taken in order to achieve the entity’s objectives
d. Activities that deal with the ongoing assessment of the quality of internal
control by management

17. When the auditor attempts to understand the operation of the accounting
system by tracing a few transactions through the accounting system, the
auditor is said to be:
a. Tracing
b. Vouching
c. Performing a walk through
d. Testing controls

18. Which of the following is not a medium that can normally be used by an auditor
to record information concerning a client’s internal control policies and
procedures?
a. Narrative memorandum
b. Flowchart
c. Procedures manual
d. Questionnaire

19. An auditor uses the knowledge provided by the understanding of internal

control and the final assessed level of control risk primarily to determine the
nature, timing and extent of the
a. Attribute tests
b. Tests of controls
c. Compliance tests
d. Substantive tests
20. Based on the requirement of PSA 3330, how frequently must an auditor test
operating effectiveness of controls that appear to functions as they have in past
years and on which the auditor wishes to rely in the current year?
a. Monthly
b. Each audit
 c. At least every second audit
d. At least every third audit

CHAPTER 4:

1. These are acts of omission or commission by the entity being audited, either
intentional or unintentional, which are contrary to the prevailing laws and
regulations.
a. Fraud
b. Misappropriation
c. Noncompliance
d. Defalcation
2. 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

3. The principle of professional competence and due care imposes certain

obligations on professional accountants. Which of the following is not one of
those obligations required by this principle?
a. To act diligently in accordance with applicable technical and professional
standards
b. To be fair, intellectually honest and free of conflict of interest
c. To become aware and understand relevant technical, professional and
business developments
d. To obtain professional knowledge and experience to enable them to fulfil
their responsibilities

4. The phase of professional competence that requires a professional accountant

to adopt a program designed to ensure quality control in the performance of
professional services consistent with technical and professional standards is:
a. Attainment of professional competence
b. Maintenance of professional competence
c. Application of professional competence
d. Review of professional competence

5. The essence of the due care principle is that the auditor should not be guilty of:
a. Bias
b. Errors in judgement
c. Fraud
d. Negligence

6. The principle of confidentiality applies to:

a. Professional accountants in public practice
b. Professional accountants in commerce and industry
c. Professional accountants in government
d. All professional accountants

7. The principle of confidentiality imposes an obligation on professional

accountants to refrain from:
a. Disclosing confidential information to another party even if client
authorizes the disclosure
b. Using confidential information acquired as a result of professional and
business relationships to their personal advantage or the advantage of
the third parties
c. Disclosing information to defend themselves in case of litigation
d. Responding to an inquiry or investigation conducted by the Professional
Regulatory Board of Accountancy
8. A CPA should not disclose confidential information obtained during an audit
engagement in which one of the following situations?
a. When the security of the state requires
b. With the consent of the client
c. In defense of himself when sued by his client
d. To a successor auditor without the client’s permission

9. Which of the following is considered a violation of rules on confidentiality?

a. The CPA discloses information to protect his own interest in the course of
legal proceedings
b. The CPA discloses information to a successor auditor after obtaining the
client’s permission
c. The CPA discloses information to another CPA in compliance with a quality
control review conducted by the BOA
d. The CPA divulges information disclosed to him by a prospective client.

10. In which of the following circumstances would a CPA be bound by the ethics to
refrain from disclosing any confidential information obtained during course of a
professional engagement?
a. The CPA is issued summon enforceable by the court order which orders
the CPA to present confidential information
b. A major stockholder of a client company seeks accounting information
from CPA after the management declined to disclose the requested
information
c. Confidential client information is made available with the client’s
permission
d. An inquiry by the PRC and the CPA needs the disclosure to defend himself

11. The principle of professional behaviour requires a professional accountant to

a. Be straightforward and honest in performing professional services
b. Be fair and should not allow prejudice or bias, conflict of interest or
influence of others to override objectivity
c. Perform professional services with due care, competence and diligence
d. Act in a manner consistent with the good reputation of the profession and
refrain from any conduct which might bring discredit to profession

12. Which of the following most accurately states how objectivity has been defined
by the Code of Ethics?
a. Being honest and straight forward in all professional and business
relationships.
b. A state of mind that permits the provision of an opinion without being
affected by influences that compromise professional judgement
c. A combination of impartiality, intellectual honesty and a freedom from
conflict of interest
d. Avoiding facts and circumstances that could reduce the public confidence
in the professional accountant’s report

13. Which fundamental principle is seriously threatened by an engagement that is

compensated based on the net proceeds on loans received by the client from a
commercials bank?
 a. Integrity
b. Objectivity
c. Confidentiality
d. Professional behaviour

14. Independence is required whenever a professional accountant performs:

a. Professional services
b. Assurance services
c. Non-assurance services
d. Tax consultancy services

15. It refers to the avoidance of facts and circumstances that are so significant that
a reasonable and informed third party, having knowledge of all relevant
information, including safeguards applied, would reasonably conclude a firm’s or
a member of the assurance team’s integrity, objectivity or professional
scepticism had been compromised.
a. Independence in fact
b. Independence in appearance
c. Independence in mind
d. Inherent independence

16. This occurs as a result of the financial or other interests of a professional

accountant or of an immediate or close family member.
a. Self-interest threat
b. Self-review threat
c. Advocacy threat
d. Familiarity threat

17. Acting for an audit client in the resolution of a dispute or litigation would most
likely create
a. Self-interest threat
b. Intimidation threat
c. Advocacy threat
d. Familiarity threat

18. The preparation of accounting records of financial statements for an audit client
will most likely create
a. Self-interest threat
b. Self-review threat
c. Intimidation threat
d. Familiarity threat

19. Accepting gift or undue hospitality from an assurance client would create most
likely create
a. Familiarity threat
b. Self-review threat
c. Advocacy threat
d. Intimidation threat
20. Using the same senior personnel on an assurance engagement over a long
period of time would most likely create
a. Intimidation threat
b. Advocacy threat
c. Familiarity threat
d. Self-interest threat
CHAPTER 5
1. This consists of checking the mathematical accuracy of documents of records.
a. Reperformance
b. Confirmation
c. Recalculation
d. Inspection

2. Which of the following assertions does not relate to balances at period end?
a. Existence
b. Occurrence
c. Valuation or allocation
d. Rights and obligations

3. Which of the following assertions does not relate to classes of transactions

and events for the period?
a. Completeness
b. Valuation
c. Cut-off
d. Accuracy

4. An assertion that transactions are recorded in the proper accounting period is:
a. Classification
b. Occurrence
c. Accuracy
d. Cut-off

5. Which of the following is not normally performed in the preplanning or

pre- engagement phase?
a. Deciding whether to accept or reject an audit engagement
b. Inquiring from predecessor auditor
c. Preparing an engagement letter
d. Making a preliminary estimate of materiality

6. Before accepting an engagement to audit a new client, a CPA is required

to obtain
a. A preliminary understanding of the prospective client’s industry and
business
b. The prospective client’s signature to the engagement letter
c. An understanding of the prospective client’s control environment
d. A representation letter from the prospective client

7. Preliminary knowledge about the client’s business and industry must be

obtained prior to the acceptance of the engagement primarily to
a. Determine the degree of knowledge and expertise required by the
engagement
b. Determine the integrity of management
c. Determine whether the firm is independent with the client
 d. Gather evidence about the fairness of the financial statements

8. In an audit, communication between the predecessor and incoming

auditor should be
a. Authorized in an engagement letter
b. Acknowledged in a representation letter
c. Either written or oral
d. Written and included in the working papers

9. Arnel, CPA, is succeeding Von, CPA, on the audit engagement of Almar

Corporation. Arnel plans to consult Von and to review Von’s prior year
working papers. Arnel may do so if
a. Von and Almar consent
b. Almar consents
c. Von consents
d. Von and Arnel consent

10. An incoming auditor should request the new client to authorize the
predecessor auditor to allow a review of the predecessor’s
Engagement letter Working Paper
a. Yes Yes
b. Yes No
c. No Yes
d. No No

11. Engagement letter that documents and confirms the auditor’s acceptance of
the engagement would normally be sent to the client
a. Before the audit report is issued
b. After the audit report is issued
c. At the end of fieldwork
d. Before the commencement of the engagement

12. Which of the following is not one of the principal contents of an

engagement letter?
a. Objective of the financial statements
b. Unrestricted access to records and documents
c. Limitations of the engagement
d. Management’s responsibility for the financial statements

13. Arrangements concerning which of the following are least likely to be included
in engagement letter?
a. Auditor’s responsibilities
b. Fees and billing
c. CPA investment in client securities
d. Other forms of reports to be issued in addition to the audit report

14. The audit engagement letter should generally include a reference to each of
the following except
a. The expectation of receiving a written management representation letter
 b. A request for the client to confirm the terms of engagement
c. A description of the auditor’s method of sample selection
d. The risk that material misstatements may remain undiscovered

15. Which of the following would be least likely to be included in the

auditor’s engagement letter
a. Forms of the report
b. Extent of his responsibilities
c. Objectives and scope of the audit
d. Type of opinion to be issued

16. According to PSA 210, the auditor and the client should agree on the terms
of engagement. The agreed terms would need to be recorded in a(n)
a. Memorandum to be placed in the permanent section of the auditing
working papers
b. Engagement letter
c. Client representation letter
d. Comfort letter

17. Which of the following factors most likely would influence an

auditor’s determination of the auditability of the entity’s financial
statements
a. The complexity of the accounting systems
b. The existence of related party transactions
c. The adequacy of the accounting records
d. The operating effectiveness of control procedures

18. Which of the following factors most likely would cause an auditor not to accept
a new audit engagement?
a. An inadequate understanding of the entity’s interval control structure
b. The close proximity to the end of the entity’s fiscal year
c. Concluding that the entity’s management probably lacks integrity
d. An inability to perform preliminary analytical procedures before
assessing control risk

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

20. An incoming auditor most likely would make specific inquiries of the
predecessor auditor regarding
a. Specialized accounting principles of the client’s industry
b. The competency of the client’s internal audit staff
c. The uncertainty inherent in applying sampling procedures
d. Disagreements with management as to auditing procedures
CHAPTER 6:
1. Which of the following statements is most correct regarding the primary
purpose of audit procedures?
a. To detect all errors or fraudulent activities as well as illegal activities
b. To comply with the SEC
c. To gather corroborative audit evidence about management’s
assertions regarding the client’s financial statements
d. To determine the amount of errors in the balance sheet accounts in order
to adjust the accounts to actual
2. A procedure designed to test for monetary misstatements directly affecting
the validity of the financial statement balances is a:
a. Test of controls
b. Substantive test
c. Test of attributes
d. Monetary-unit sampling test

3. You are auditing the company’s purchasing process for goods and services.
You are primarily concerned with the company not recording all purchase
transactions. Which audit procedure below would be the most effective audit
procedure in this case?
a. Vouching from the accounts payable account to the vendor invoices.
b. Tracing vendor invoices to recorded amounts in the accounts
payable account.
c. Confirmation of accounts payable recorded amounts.
d. Reconciling the accounts payable subsidiary ledger to the
accounts payable account.

4. The information obtained by the auditor in arriving at the conclusions on

which the audit opinion is based is called:
a. Audit working papers
b. Audit assertions
c. Audit evidence
d. Audit standards

5. The major reason an independent auditor gathers evidence is to

a. form an opinion on the financial statements.
b. detect fraud.
c. evaluate management.
d. evaluate internal control.

6. Which of the following is the best example of a corroborating evidence?

a. General journal
b. Worksheet cost allocation
c. Vendor’s invoice
d. Cash receipts journal

7. Which of the following statements about audit evidence is correct?

a. Appropriateness is the measure of the quantity of audit evidence.
b. Sufficiency is the measure of the quality of audit evidence and
its relevance to a particular assertion and its reliability.
c. Audit evidence is more persuasive when items of evidence from different
sources or of different nature are consistent.
d. There should be a one-to-one relationship between audit objective
and audit procedure.

8. Evidence is generally considered appropriate when:

a. it has been obtained by random selection.
 b. there is enough of it to afford a reasonable basis for an opinion
on financial statements.
c. it has the qualities of being relevant, objective, and free from known bias.
d. it consists of written statements made by managers of the
enterprise under audit.

9. Evidence are generally considered sufficient when:

a. it is appropriate.
b. there is enough of it to afford a reasonable basis for an opinion
on financial statements.
c. it has the qualities of being relevant, objective and free from unknown
bias.
d. it has been obtained by random selection.

10. Appropriateness of evidence is a measure of the:

a. quantity of evidence.
b. quality of evidence.
c. sufficiency of evidence.
d. meaning of evidence.

11. The sufficiency and appropriateness of evidential matter ultimately is based

on the
a. availability of corroborating data.
b. Philippine Standard on Auditing.
c. pertinence of the evidence.
d. judgment of the auditor.

12. An example of an external document that provides reliable information for

the auditor is:
a. employees time reports.
b. bank statements.
c. purchase order for company purchases.
d. carbon copies of checks.

13. An example of a document that the auditor receives from the client, but
which was prepared by someone outside the client’s organization, is a:
a. confirmation.
b. sales invoice.
c. vendor invoice.
d. bank reconciliation.
14. To be considered reliable evidence, confirmations must be controlled by:
a. a client employee responsible for accounts receivable.
b. a financial statement auditor.
c. a client’s internal audit department.
d. a client’s controller or CFO.

15. Given the economic and time constraints in which auditors can collect
evidence about management assertions about the financial statements, the
auditor normally gathers evidence that is:
 a. irrefutable.
b. conclusive.
c. persuasive.
d. completely convincing.

16. It refers to the material (working papers) prepared by and for, or obtained
and retained by the auditor in connection with the performance of the audit.
a. Documentation
b. Audit report
c. Accounting data
d. Corroborative evidence

17. Which of the following best describes one of the primary objectives of
audit documentation?
a. Defend against claims of a deficient audit.
b. Provide a principal support for the income taxation return.
c. Provide documentation that the audit was conducted in accordance
with auditing standards.
d. Provide additional support or recorded amounts to the client.

18. Which of the following is not an expert upon whose work an auditor may relay?
a. Actuary
b. Internal auditor
c. Appraiser
d. Engineer

19. An expert whose expertise is used by the entity in preparing financial

statements is called a(n):
a. Financial expert
b. Management expert
c. Auditor’s expert
d. Specialist

20. External auditors must obtain evidence regarding what attributes of an

internal audit department if the external auditors intend to rely on internal
auditor’s work?
a. Integrity
b. Objectivity
c. Competence
d. All of the above
CHAPTER 7
1. This involves developing an overall strategy for the expected conduct and
scope of the examination; the nature, extent, and timing of which vary with
the size and complexity, and experience with and knowledge of the entity.
a. Audit planning
b. Audit procedure
c. Audit program
d. Audit working papers

2. Initial planning involves four matters. Which of the following is not one of these?
a. Develop an overall audit strategy
b. Request that bank balances be confirmed
 c. Schedule engagement staff and audit specialists
d. Identify the client’s reason for the audit

3. A CPA is conducting the first examination of a client’s financial statements.

The CPA hopes to reduce the audit work by consulting with the predecessor
auditor and reviewing the predecessor’s working papers. This procedure is
a. Acceptable if the client and the predecessor auditor agree to it.
b. Acceptable if the CPA refers in the audit report to reliance upon
the predecessor auditor’s work.
c. Required if the CPA is to render an unmodified opinion.
d. Unacceptable because the CPA should bring an independent
viewpoint to a new engagement.

4. The preliminary judgment about materiality and the amount of audit

evidence accumulated are related.
a. directly
b. indirectly
c. not
d. inversely

5. According to PSA 320, materiality should be considered by the auditor when:

Determining the nature, timing Evaluating the
effects and extent of audit procedures. of
misstatements
a. YES YES
b. YES NO
c. NO NO
d. NO YES

6. 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 the applicable financial reporting framework, 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 material to 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.

7. “Performance materiality” is the term used to indicate materiality at the:

a. balance sheet level
b. account balance level
c. income statement level
d. company-wide level
8. When comparing level of materiality used for planning purposes and the level
of materiality used for evaluating evidence, one would most likely expect
a. The level of materiality to be always similar.
b. The level of materiality for planning purposes to be similar.
c. The level of materiality for planning purposes to be higher.
d. The level of materiality for planning purposes to be based on
total assets while the level of materiality for evaluating purposes
to be based on net income.

9. Qualitative factors can affect an auditor’s assessment of materiality. Which of

the following qualitative factors could influence the assessment of
materiality?
I. Misstatements that are otherwise immaterial may be material if affect
earnings trends.
II. Minor misstatements resulting from the consequences of
contractual obligations.
a. I only
b. II only
c. I and II
d. neither I or II

10.Auditors frequently refer to the terms audit assurance, overall assurance, ad

level of assurance to refer to .
a. detection risk
b. audit report risk
c. acceptable audit risk
d. inherent risk

11.The risk that financial statements are likely to be misstated materially

without regard to the effectiveness of internal control is the;
a. Inherent risk
b. Audit risk
c. Client risk
d. Control risk

12.When planning a financial statement audit, the auditor should assess

inherent risk at the
Financial statement level Account balance or transaction class level
a. YES YES
b. YES NO
c. NO NO
d. NO YES

13.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 risk.
 c. The greater the inherent and control risk the auditor believes exist,
the less detection risk that can be accepted.
d. The auditor might make separate or combines assessments of inherent
risk and control risk.

14.Relationship between control risk and detection risk is ordinarily

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

15.Which of the following is not correct regarding an auditor’s decision that a

lower acceptable audit risk is appropriate?
a. More evidence is accumulated
b. Less evidence is accumulated
c. Special care is required in assigning experienced staff
d. Review of audit documentation is performed by personnel not
assigned to the engagement

16.These consist of the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationship that are inconsistent
with other relevant information or deviate from predictable amount.
a. Financial statement analysis
b. Variance analysis
c. Analytical procedures
d. Regression analysis

17. Which of the following statements about analytical procedures is incorrect?

a. Analytical procedures are required to be performed in the
planning phase of the audit.
b. Analytical procedures are required to be done during the testing phase
of the audit.
c. Analytical procedures are required to be done during the
completion phase of the audit.
d. Analytical procedures may be performed in the planning, testing and
completion phases of the audit.

18.In developing the overall audit plan and audit program, the auditor
should assess inherent risk at the:
Audit plan Audit program
a. Financial statement level Accounting balance level
b. Account balance level Financial statement level
c. Account balance level Account balance level
d. Financial statement level Financial statement level

19. An auditor should design the written audit program so that

a. All material transactions will be selected for substantive testing
 b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls
or tests of transactions.

20. Which of the following matters would least likely appear in the audit program?
a. Specific procedures that will be performed.
b. Specific audit objectives.
c. Estimated time that will be spent in performing certain procedures.
d. Documentation of the accounting and internal control systems
being reviewed.

CHAPTER 8
1. This involves the application of the procedures to less than 100% of the items
within an account balance or class of transactions. This enables the auditor to
obtain and evaluate audit evidence about some characteristics of the selected
items in order to form an opinion about the characteristics of all items
supporting an account balance or transaction class.
a. Audit techniques
b. Selective testing
c. Audit sampling
d. Specific identification

2. Audit sampling for substantive tests is appropriate when

a. Analytical procedures are used
b. The auditor wants to eliminate sampling risks
c. A population contains small number of large value items
d. Tests of details are performed

3. Audit sampling for test of control is generally appropriate when

a. Control leaves evidence of performance
b. Control leaves no evidence of performance
c. 100% of the transactions is tested
d. Examining specific high value items in the population
4. In a sampling application, the group of items about which the auditor wants to
estimate some characteristic is called the
a. Population c. Attribute of interest
b. Sample d. Sampling unit

5. Non-sampling error occur when the audit tests do not uncover existing
exceptions in the
a. Population
b. Planning stage
c. Sample
d. Financial statement

6. PSA 530 identifies two general approaches to audit sampling. They are
a. Random & nonrandom
b. Statistical & nonstatistical
c. Precision & reliability
d. Risk and nonrisk

7. The relationship between sample size and the allowable sampling risks is
a. Direct
b. Inverse
c. Sample deviation rate
d. Expected deviation rate

8. Principal methods of sampling selection include all of the following except

a. Haphazard
b. Random number
c. Systematic
d. Statistical

9. A sample in which every possible combination of items in the population has a

chance of constituting the sample is a
a. Representative sample
b. Random sample
c. Statistical sample
d. Judgment sample

10. The process which requires the calculation of an interval and them selects the
items based on the size of the interval is
a. Statistical sampling
b. Systematic selection
c. Random selection
d. Computerized selection

11.A method of sampling in which all the items in the population are divided into
two or more sub-population is
a. Variable sampling
b. Stratified sampling
c. Attribute sampling
 d. Divisible sampling

12. 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. Random sampling
c. Variables sampling
d. Peso-unit sampling

13. Which of the following statistical sampling plans does not use a fixed sample
size for tests of controls?
a. PPS sampling
b. Value-weighted sampling
c. Sequential sampling
d. Variables sampling

14. Value weighted sampling is most appropriate when the auditor

a. Anticipates understatement errors
b. Expects no errors
c. Anticipate overstatement errors
d. Has assessed control risk at high level

15. The maximum amount of error in a population that the auditor is willing to
accept is referred to as the
a. Acceptable risk
b. Tolerable error
c. Expected error
d. Tolerable materiality

16. The deviation rate the auditor expects to find in the population, before testing
begins, is called the
a. Tolerable deviation rate
b. Computer upper deviation rate
c. Sample deviation rate
d. Expected deviation rate

17. Which of the following sampling methods would be most appropriate in

performing tests of controls over authorization of cash disbursements
a. Attributes
b. Variables
c. Ratio
d. Stratified

18. In assessing sample risk, alpha risk relate to the

a. Efficiency of the audit
b. Selection of the sample
c. Effectiveness of the audit
d. Audit quality controls
19. Which of the following sampling plans would be designed to estimate a
numerical measurement of a population such as peso value?
a. Numerical sampling
b. Sampling attributes
c. Discovery sampling
d. Sampling for variables

20. Statistical samples do not allow

a. A. more efficient samples
b. Measurement of sample reliability
c. Replacement of the auditor’s professional judgment
d. Measurement of sample risk