AUDITING THEORY

ASSURANCE SERVICES

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

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

2. Which of the following is not an assurance service?

A. Examination of prospective financial information
B. Audit of historical financial statements
C. Review of financial statements
D. Compilation of financial information

3. Suitable criteria are required for reasonably consistent evaluation or

measurement of the subject matter of an assurance engagement. Which of
the following statements concerning the characteristics of suitable
criteria is correct?
A. Reliable criteria contribute to conclusions that are clear,
comprehensive, and not subject to significantly different
interpretations.
B. Relevant criteria allow reasonably consistent evaluation or
measurement of the subject matter including, where relevant,
presentation and disclosure, when used in similar circumstances by
similarly qualified practitioners.
C. Neutral criteria contribute to conclusions that are free from bias.
D. Criteria are sufficiently complete when they contribute to
conclusions that are clear, comprehensive, and not subject to
different interpretations.

4. In an assurance engagement, the outcome of the evaluation or measurement

of a subject matter against criteria is called
A. Subject matter information
B. Subject matter
C. Assurance
D. Conclusion

5. In some assurance engagements, the evaluation or measurement of the

subject matter is performed by the responsible party, and the subject
matter information is in the form of an assertion by the responsible
party that is made available to intended users. These engagements are
called
A. Direct reporting engagements
B. Assertion-based engagements
C. Non-assurance engagements
D. Recurring engagements

6. What type of assurance engagement is involved when the practitioner

expresses a positive form of conclusion?
A. Limited assurance engagement
B. Positive assurance engagement
C. Reasonable assurance engagement
D. Absolute assurance engagement

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7. What type of assurance engagement is involved when the practitioner
expresses a negative form of conclusion?
A. Reasonable assurance engagement
B. Negative assurance engagement
C. Assertion-based assurance engagement
D. Limited assurance engagement
8. Which of the following statements is true concerning evidence in an
assurance engagement?
A. Sufficiency is the measure of the quantity of evidence.
B. Appropriateness is the measure of the quality of evidence, that is,
its reliability and persuasiveness.
C. The reliability of evidence is influenced not by its nature but by
its source.
D. Obtaining more evidence may compensate for its poor quality.

9. Assurance engagement risk is the risk

A. That the practitioner expresses an inappropriate conclusion when the
subject matter information is materially misstated.
B. Of expressing an inappropriate conclusion when the subject matter
information is not materially misstated.
C. Through loss from litigation, adverse publicity, or other events
arising in connection with a subject matter reported on.
D. Of expressing an inappropriate conclusion when the subject matter
information is either materially misstated or not materially
misstated.

10. Reducing assurance engagement risk to zero is very rarely attainable or

cost beneficial as a result of the following factors, except
A. The use of selective testing.
B. The fact that much of the evidence available to the practitioner is
persuasive rather than conclusive.
C. The practitioner may not have the required assurance knowledge and
skills to gather and evaluate evidence.
D. The use of judgment in gathering and evaluating evidence and forming
conclusions based on that evidence.

11. The Philippine Framework for Assurance Engagements

A. Contains basic principles, essential procedures, and related guidance
for the performance of assurance engagements.
B. Defines and describes the elements and objectives of an assurance
engagement, and identifies engagements to which PSAs, PSREs, and
PSAEs apply.
C. Provides a frame of reference for CPAs in public practice when
performing audits, reviews, and compilations of historical financial
information.
D. Establishes standards and provides procedural requirements for the
performance of assurance engagements.

12. After accepting an assurance engagement, a practitioner is not allowed

to change the engagement to a non-assurance engagement, or from a
reasonable assurance engagement to a limited assurance engagement,
except when there is reasonable justification for the change. Which of
the following ordinarily will justify a request for a change in the
engagement?
I. A change in circumstances that affects the intended users’
requirements.
II. A misunderstanding concerning the nature of the engagement.
A. I only C. Both I and II
B. II only D. Neither I nor II

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AUDITING AND RELATED SERVICES

13. PSRE 2400 (Engagements to Review Financial Statements), as amended by

the AASC in February 2008, applies to
A. Reviews of any historical financial information of an audit client.
B. Reviews of any historical financial information by a practitioner
other than the entity’s auditor.
C. Reviews of historical financial or other information by a
practitioner other than the entity’s auditor.
D. Reviews of historical financial or other information of an audit
client.
14. When performing a compilation engagement, the accountant is required to
A. Assess internal controls.
B. Make inquiries of management to assess the reliability and
completeness of the information provided.
C. Verify matters and explanations.
D. Obtain a general knowledge of the business and operations of the
entity.

15. Inquiries and analytical procedures ordinarily form the basis for which
type of engagement?
A. Agreed-upon procedures.
B. Audit.
C. Examination.
D. Review.

16. Independence is not a requirement for which of the following

engagements?
Compilation Review Agreed-upon Procedures
A. No Yes No
B. No No No
C. Yes No Yes
D. Yes Yes Yes

17. A practitioner should accept an assurance engagement only if

A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended users.
C. The practitioner’s conclusion is to be contained in a written report.
D. The subject matter is the responsibility of either the intended users
or the practitioner.

18. A practitioner is associated with financial information when

I. The practitioner attaches a report to that financial information.
II. The practitioner consents to the use of his/her name in a
professional connection.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

19. The auditor is required to comply with all PSAs relevant to the audit of
an entity’s financial statements. A PSA is relevant to the audit when
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist.
A. I only C. Either I or II
B. II only D. Both I and II

20. The overall objectives of the auditor in conducting an audit of

financial statements are

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 I. To obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether
caused by fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence.
IV. To detect all misstatements, whether due to fraud or error.
A. I and II only
B. II and IV only
C. I, II, and III only
D. I, II, III, and IV

21. The auditor is required to maintain professional skepticism throughout

the audit. Which of the following statements concerning professional
skepticism is false?
A. A belief that management and those charged with governance are honest
and have integrity relieves the auditor of the need to maintain
professional skepticism.
B. Maintaining professional skepticism throughout the audit reduces the
risk of using inappropriate assumptions in determining the nature,
timing, and extent of the audit procedures and evaluating the results
thereof.
C. Professional skepticism is necessary to the critical assessment of
audit evidence.
D. Professional skepticism is an attitude that includes questioning
contradictory audit evidence obtained.

22. Which of the following best describes the reason why independent
auditors report on financial statements?
A. A management fraud may exist and it is more likely to be detected by
independent auditors.
B. Different interests may exist between the company preparing the
statements and the persons using the statements.
C. A misstatement of account balances may exist and is generally
corrected as the result of the independent auditors’ work.
D. Poorly designed internal control may be in existence.

23. Which of the following professionals has primary responsibility for the
performance of an audit?
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.

24. What is the proper organizational role of internal auditing?

A. To serve as an independent, objective assurance and consulting
activity that adds value to operations.
B. To assist the external auditor in order to reduce external audit
fees.
C. To perform studies to assist in the attainment of more efficient
operations.
D. To serve as the investigative arm of the audit committee of the board
of directors.

25. Operational audits generally have been conducted by internal and COA
auditors, but may be performed by certified public accountants. A
primary purpose of an operational audit is to provide
A. A measure of management performance in meeting organizational goals.
B. The results of internal examinations of financial and accounting
matters to a company’s top-level management.
C. Aid to the independent auditor, who is conducting the examination of
the financial statements.

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 D. A means of assurance that internal accounting controls are
functioning as planned.

26. Governmental auditing often extends beyond examinations leading to the

expression of opinion on the fairness of financial presentation and
includes audits of efficiency, economy, effectiveness, and also
A. Accuracy.
B. Evaluation.
C. Compliance.
D. Internal control.

27. Which of the following terms best describes the audit of a taxpayer’s
return by a BIR auditor?
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit.

28. Which of the following statements concerning consulting services is

false?
A. The performance of consulting services for audit clients does not, in
and of itself, impair the auditor’s independence.
B. Consulting services differ fundamentally from the CPA’s function of
attesting to the assertions of other parties.
C. Consulting services ordinarily involve external reporting.
D. Most CPAs, including those who provide audit and tax services, also
provide consulting services to their clients.

29. Which of the following is the most appropriate action to be taken by a

CPA who has been asked to perform a consulting services engagement
concerning the analysis of a potential merger if he/she has little
experience with the industry involved?
A. Accept the engagement but he/she should conduct research or consult
with others to obtain sufficient competence.
B. Decline the engagement because he/she lacks sufficient knowledge.
C. Accept the engagement and issue a report that contains his/her
opinion on the achievability of the results of the merger.
D. Accept the engagement and perform it in accordance with Philippine
Standards on Auditing (PSAs).

30. An objective of a performance audit is to determine whether an entity’s

A. Operational information is in accordance with government auditing
standards.
B. Specific operating units are functioning economically and
efficiently.
C. Financial statements present fairly the results of operations.
D. Internal control is adequately operating as designed.

31. Internal auditors should review the means of physically safeguarding

assets from losses arising from
A. Exposure to the elements.
B. Underusage of physical facilities.
C. Misapplication of accounting principles.
D. Procedures that are not cost justified.

32. The internal auditing department’s responsibility for deterring fraud is

to
A. Establish an effective internal control system.
B. Maintain internal control.
C. Examine and evaluate the system of internal control.
D. Exercise operating authority over fraud prevention activities.

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33. Internal auditors review the adequacy of the company’s internal control
system primarily to
A. Help determine the nature, timing, and extent of tests necessary to
achieve audit objectives.
B. Determine whether the internal control system provides reasonable
assurance that the company’s objectives and goals are met efficiently
and economically.
C. Ensure that material weaknesses in the system of internal control are
corrected.
D. Determine whether the internal control system ensures that financial
statements are fairly presented.

34. Which of the following services, if any, may a practitioner who is not
independent provide?
A. Compilations but not reviews.
B. Reviews but not compilations.
C. Reviews but not financial statement audits.
D. Agreed-upon procedures but not compilations.

THE ACCOUNTANCY PROFESSION

35. The members of the Professional Regulatory Board of Accountancy shall be

appointed by the
A. Philippine Institute of CPAs (PICPA).
B. Professional Regulation Commission (PRC).
C. President of the Philippines.
D. Association of CPAs in Public Practice (ACPAPP).

36. The following statements relate to the submission of nominations to the

Board of Accountancy. Which is correct?
A. The Accredited National Professional Organization of CPAs (APO) shall
submit its nominations to the president of the Philippines not later
than sixty (60) days prior to the expiry of the term of an incumbent
chairman or member.
B. The APO shall submit its nominations to the PRC not later than thirty
(30) days prior to the expiry of the term of an incumbent chairman or
member.
C. If the APO fails to submit its own nominee(s) to the PRC within the
required period, the PRC in consultation with the Board of
Accountancy shall submit to the president of the Philippines a list
of five (5) nominees for each position.
D. There should be adequate documentation to show the qualifications and
primary field of professional activity of each nominee.

37. The following statements relate to the term of office of the chairman
and members of the Board of Accountancy (BOA). Which is false?
A. The chairman and members of the BOA shall hold office for a term of
three (3) years.
B. Any vacancy occurring within the term of a member shall be filled up
for the unexpired portion of the term only.
C. No person who has served two successive complete terms as chairman or
member shall be eligible for reappointment until the lapse of two (2)
years.
D. Appointment to fill up an unexpired term is not to be considered as a
complete term.

38. The Board of Accountancy has the power to conduct an oversight into the
quality of audits of financial statements through a review of the
quality control measures instituted by auditors in order to ensure
compliance with the accounting and auditing standards and practices.
This power of the BOA is called
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 A. Quality assurance review C. Appraisal
B. Peer review D. primar

39. The Board of Accountancy shall submit to the PRC the ratings obtained by
each candidate within _____ days after the examination, unless extended
for just cause.
A. 10 C. 2
B. 5 D. 3

40. Which of the following shall be issued to examinees who pass the CPA
licensure examination?
A. Certificate of registration and death certificate.
B. Professional identification card and warrant of arrest.
C. Certificate of registration and professional identification card.
D. Warrant of arrest and death certificate.

41. Which of the following statements concerning the issuance of

Certificates of Registration and Professional Identification Cards to
successful examinees is correct?
A. The Certificate of Registration issued to successful examinees is
renewable every three (3) years.
B. The Professional Identification Card issued to successful examinees
shall remain in full force and effect until withdrawn, suspended or
revoked in accordance with RA 9298.
C. The BOA shall not register and issue a Certificate of Registration
and Professional Identification Card to any successful examinee of
unsound mind.
D. The BOA may, after the expiration of three (3) years from the date of
revocation of a Certificate of Registration, reinstate the validity
of a revoked Certificate of Registration.

42. Which of the following statements concerning ownership of working papers

is incorrect?
A. All working papers made by a CPA and his/her staff in the course of
an examination remain the property of such CPA in the absence of a
written agreement between the CPA and the client to the contrary.
B. Working papers include schedules and memoranda prepared and submitted
by the client of the CPA.
C. Working papers include reports submitted by a CPA to his/her client.
D. Working papers shall be treated confidential and privileged unless
such documents are required to be produced through subpoena issued by
any court, tribunal, or government regulatory or administrative body.

43. Any person who shall violate any of the provisions of the Accountancy
Act or any of its implementing rules and regulations promulgated by the
Board of Accountancy subject to the approval of the PRC, shall, upon
conviction, be punished by
A. A fine of not more than P50,000.
B. Imprisonment for a period not exceeding two years.
C. A fine of not less than P50,000 or by imprisonment for a period not
exceeding two years or both.
D. Lethal injection.

44. Which of the following statements concerning the use of firm or

partnership name is incorrect?
A. In the case of an individual CPA, he/she shall do business under
his/her registered name with the BOA and the PRC and as printed in
his/her CPA certificate (for example, Juan Puruntong, CPA).
B. In the case of a firm, it shall do business under its duly registered
and authorized firm name appearing in the registration documents
issued by the Department of Trade and Industry (DTI) and other
government offices and such firm name shall include the real name of
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 the sole proprietor as printed in his/her CPA certificate (for
example, Arnulfo Gumamela and Associates).
C. In the case of a registered partnership, it shall do business under
its name as indicated in its current Articles of Partnership and
Certificate of Registration issued by the Securities and Exchange
Commission (SEC) (for example, Tanya, Sam, and Jervi, CPAs).
D. A CPA shall practice only under an individual, firm, or partnership
name in accordance with Philippine laws and shall not include any
fictitious name but may indicate specialization.

45. A partner surviving the death or withdrawal of all the other partners in
a partnership may continue to practice under the partnership name for a
period of not more than _____ years after becoming a sole proprietor.
A. 1 C. 3
B. 2 D. 4

46. The death or disability of an individual CPA and/or the dissolution and
liquidation of a firm or partnership of CPAs shall be reported to the
BOA not later than _____ days from the date of such death, dissolution
or liquidation.
A. 15 C. 60
B. 30 D. 90

47. The following statements relate to CPE credit units. Which is

incorrect?
A. The total CPE credit units for registered accounting professionals
shall be sixty (60) credit units for three (3) years, provided that a
minimum of fifteen (15) credit units shall be earned in each year.
B. Any excess credit units in one year may be carried over to the
succeeding years within the three-year period.
C. Excess credit units earned may be carried over to the next three-year
period including credit units earned for doctoral and master’s
degrees.
D. One credit hour of CPE program, activity or source shall be
equivalent to one (1) credit unit.

48. Which of the following statements concerning a CPA’s disclosure of

confidential client information is ordinarily correct?
A. Disclosure may be made to any party on consent of the client.
B. Disclosure should not be made even if such disclosure will protect
the CPA’s professional interests in legal proceedings.
C. Disclosure should be made only if there is a legal or professional
duty to make the disclosure.
D. Disclosure may be made to any government agency without subpoena.

49. Listed below are names of four CPA firms and pertinent facts relative to
each firm. Unless otherwise indicated, the individuals named are CPAs
and partners, and there are no other partners. Which is a violation of
the Implementing Rules and Regulations of RA 9298?
A. Tin, Ton and Tan, CPAs (Tin died about five years ago; Ton and Tan
are continuing the firm.)
B. Pol and Bon, CPAs (The name of Cua, a third partner, is omitted from
the partnership name.)
C. Joni and Jona, CPAs (Joni died about three years ago; Jona is
continuing the firm as a sole proprietor.)
D. Elias and Co., CPAs (The firm has ten other partners who are all
CPAs).

50. The following statements relate to some of the provisions of RA 9298.

Which is correct?
A. Audit working papers are generally the property of the company whose
financial statements were audited.
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 B. After three (3) years, subject to certain conditions, the Board of
Accountancy may order the reinstatement of a CPA whose certificate of
registration has been revoked.
C. The penal provision (Sec. 36) of RA 9298 applies only to the
violation of any of the provisions of RA 9298 because its
Implementing Rules and Regulations are unenforceable.
D. It shall be the primary duty of the PRC and the BOA to effectively
enforce the provisions of RA 9298.

THE CPA’S PROFESSIONAL RESPONSIBILITIES

51. Which of the following statements best explains why the CPA profession
has found it essential to establish ethical standards and means for
ensuring their observance?
A. Vigorous enforcement of an established the is the best way to prevent
unscrupulous acts.
B. Ethical standards that emphasize excellence in performance over
material rewards establish a reputation for competence and character.
C. A distinguishing mark of a profession is its acceptance of
responsibility to the public.
D. A requirement for a profession is to establish ethical standards that
stress primarily a responsibility to clients and colleagues.

52. Which part of the Code establishes the fundamental principles of

professional ethics for professional accountants and provides a
conceptual framework that professional accountants shall apply to
identify threats to compliance with the fundamental principles, evaluate
the significance of the threats identified, and apply safeguards, when
necessary, to eliminate the threats or reduce them to an acceptable
level?
A. Part A.
B. Part B.
C. Part C.
D. Part D.

53. The threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures from the client is
known as
A. Intimidation threat
B. Familiarity threat.
C. Self-interest threat.
D. Advocacy threat.

54. Which of the following will not create self-interest threat for a
professional accountant in public practice?
A. The possibility of losing a significant client.
B. Direct financial interest in the assurance client.
C. Undue dependence on total fees from a client.
D. Preparing the original data used to generate records that are the
subject matter of the assurance engagement.

55. Familiarity threat could be created under the following circumstances

except
A. A professional accountant accepting gifts from a client whose value
is inconsequential or trivial.
B. Senior personnel having a long association with the assurance client.
C. A director or officer of the client or an employee in a position to
exert significant influence over the subject matter of the engagement
having recently served as the engagement partner.
D. A member of the engagement team having a close or immediate family
member who is a director or officer of the client.
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56. This threat to independence occurs when a member of the assurance team
has recently performed services for an assurance client that directly
affect the subject matter information of the assurance engagement (e.g.,
valuation services).
A. Self-review threat.
B. Advocacy threat.
C. Self-interest threat.
D. Familiarity threat.

57. Which of the following circumstances may create advocacy threat for a
professional accountant in public practice?
A. The firm promoting shares in an audit client.
B. A firm issuing an assurance report on the effectiveness of the
operation of financial systems after designing or implementing the
systems.
C. A firm being threatened with dismissal from a client engagement.
D. A firm being concerned about the possibility of losing a significant
client.

58. The following circumstances may create intimidation threats, except

A. Being threatened with dismissal or replacement in related to a client
engagement.
B. Being pressured to reduce inappropriately the extent of work
performed in order to reduce fees.
C. Being threatened with litigation.
D. A member of the assurance team being, or having recently been, a
director or officer of the client.

59. Which of the following is an example of engagement-specific safeguards

in the work environment?
A. Advising partners and professional staff of those assurance clients
and related entities from which they must be independent.
B. Disclosing to those charged with governance of the client the nature
of service provided and extent of fees charged.
C. A disciplinary mechanism to promote compliance with the firm’s
policies and procedures.
D. Published policies and procedures to encourage and empower staff to
communicate to senior levels within the firm any issue relating to
compliance with the fundamental principles that concerns them.

60. According to Section 240 of the Code of Ethics, fees charged for
assurance engagements should be a fair reflection of the value of the
work involved. In determining professional fees, the following should
be taken into account, except
A. The time necessarily occupied by each person engaged on the work.
B. The outcome or result of a transaction or the result of the work
performed.
C. The skill and knowledge required for the type of work involved.
D. The level of training and experience of the persons necessarily
engaged on the work.

61. In the case of audit engagements, it is in the public interest and,

therefore, required by the Code that members of audit teams, firms and
network firms shall be independent of audit clients. Independence
requires
A. Independence of mind only.
B. Independence in appearance only.
C. Both independence of mind and independence in appearance
D. Either independence of mind or independence in appearance

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62. When the professional accountant determines that appropriate safeguards
are not available or cannot be applied to eliminate the threats to
independence or reduce them to an acceptable level, the professional
accountant shall
I. Eliminate the circumstance or relationship creating the threats.
II. Decline or terminate the audit engagement.
A. I only
B. II only
C. Neither I nor II
D. Either I or II

63. Financial interests may be held through an intermediary (for example, a

collective investment vehicle, estate or trust). When control over the
investment vehicle or the ability to influence investment decisions
exists, the code defines that financial interest to be a/an
A. Direct financial interest.
B. Material direct financial interest.
C. Indirect financial interest.
D. Material indirect financial interest.

64. Holding a financial interest in an audit client may create a self-

interest threat. The existence and significance of any threat created
depends on
I. The role of the person holding the financial interest.
II. Whether the financial interest is direct or
indirect.
III. The materiality of the financial interest.
A. I and II only.
B. I and III only.
C. II and III only.
D. I, II, and III.

65. The concept of materiality is least important to an auditor when

considering the
A. Effects of a direct financial interest in the client upon the
auditor’s independence.
B. Decision whether to use positive or negative confirmations of
accounts receivable.
C. Adequacy of disclosure of a client’s illegal act.
D. Discovery of weaknesses in a client’s internal control.

66. A direct financial interest or a material indirect financial interest in

the audit client of a member of the audit team or his immediate family
member may create a significant self-interest threat. Which of the
following safeguards would be least likely considered to eliminate the
threat or reduce it to an acceptable level?
A. Discuss the matter with those charged with governance of the audit
client.
B. Dispose of the direct financial interest prior to the individual
becoming a member of the audit team.
C. Dispose of the indirect financial interest in total or dispose of a
sufficient amount of it so that the remaining interest is no longer
material prior to the individual becoming a member of the audit team.
D. Remove the member of the audit team from the audit engagement.

67. Jayson, CPA, was offered the engagement to audit W Corporation for the
year ended December 31, 2016. He had served as a director of W
Corporation until December 31, 2014, and his spouse currently owns 6,000
of the 100,000 outstanding share capital of W Corporation. Jayson
disassociated from W Corporation prior to being offered the engagement.
Moreover, the engagement does not cover any period that includes

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 Jayson’s association or employment with W Corporation. Under the code
of ethics, Jayson should
A. Accept the engagement.
B. Let a partner from the same office accept and conduct the engagement.
C. Refuse the engagement because he had served as a director.
D. Refuse the engagement because of his spouse’s stock ownership.

68. A loan, or guarantee of a loan, to the firm from an audit client that is
a bank or a similar institution, would not create a threat to
independence provided
I. The loan, or guarantee, is made under normal lending procedures,
terms and requirements.
II. The loan is immaterial to both the firm
receiving the loan and the audit client.
A. I only
B. II only
C. Neither I nor II
D. Both I and II

69. A close business relationship between a firm or a member of the audit

team, or a member of that individual’s immediate family, and the audit
client or its management may create
A. Self-interest and intimidation threats
B. Self-review and familiarity threats
C. Advocacy and self-review threats
D. Self-interest and self-review threats

70. When an immediate family member of a member of the assurance team is a

director, an officer, or an employee of the assurance client in a
position to exert direct and significant influence over the subject
matter information of the assurance engagement, or was in such a
position during the period covered by the engagement, the threats to
independence can only be reduced to an acceptable level by
A. Where possible, structuring the responsibilities of the assurance
team so that the professional does not deal with matters that are
within the responsibility of the immediate family member.
B. Withdrawing from the assurance engagement.
C. Removing the individual from the assurance team.
D. Discussing the issue with those charged with governance, such as the
audit committee.

71. Which of the following threats to independence is created when a member

of the assurance team participates in the assurance engagement while
knowing, or having reason to believe, that he is to, or may, join the
assurance client sometime in the future?
A. Intimidation threat
B. Self-interest threat
C. Self-review threat
D. Familiarity threat

72. Which of the following would not generally create a threat to

independence?
A. The purchase of goods and services from an assurance client by the
firm (or from a financial statement audit client by a network firm)
or a member of the assurance team provided that the transaction is in
the normal course of business and on an arm’s length basis.
B. A partner or employee of the firm or a network firm serves as Company
Secretary for a financial statement audit client.
C. Determining which recommendations of the firm should be implemented.
D. Reporting, in a management role, to those charged with governance.

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73. The following forms of assistance to a financial statement audit client
do not generally threaten the firm’s independence, except
A. Analyzing and accumulating information for regulatory reporting.
B. Assisting in resolving account reconciliation problems.
C. Authorizing or approving transactions.
D. Assisting in the preparation of consolidated financial statements.

74. As defined in the Code, “a valuation comprises the making of assumptions

with regard to future developments, the application of certain
methodologies and techniques, and the combination of both in order to
compute a certain value, or range of values, for an asset, a liability
or for a business as a whole.” Which of the following threats may be
created when a firm or a network firm performs valuation for an audit
client that is to be incorporated in the client’s financial statements?
A. Advocacy threat
B. Familiarity threat
C. Self-review threat
D. Intimidation threat

75. The following statements relate to the provision of taxation, internal

audit or IT Systems services to audit clients. Which is false?
A. Preparing calculations of current and deferred tax liabilities (or
assets) for an audit client for the purpose of preparing accounting
entries that will be subsequently audited by the firm creates a self-
interest threat.
B. A self-review threat may be created when a firm, or network firm,
provides internal audit services to an audit client.
C. The provision of services by a firm or network firm to an audit
client that involve the design and implementation of financial
information technology systems that are used to generate information
forming part of a client’s financial statements may create a self-
review threat.
D. The provision of services in connection with the assessment, design,
and implementation of internal accounting controls and risk
management controls does not create a threat to independence provided
that firm or network firm personnel do not perform management
functions.

76. What threat to independence is created when the litigation support

services provided to an audit client include the estimation of the
possible outcome and thereby affects the amounts or disclosures to be
reflected in the financial statements?
A. Self-review threat
B. Advocacy threat
C. Intimidation threat
D. Familiarity threat

77. The recruitment of senior management for an assurance client, such as

those in a position to affect the subject matter of the assurance
engagement, may create the following current or future threats to
independence, except
A. Self-interest threat
B. Familiarity threat
C. Intimidation threat
D. Self-review threat

78. When the total fees generated by an assurance client represent a large
proportion of a firm’s total fees, the dependence on that client or
client group and concern about the possibility of losing the client may
create a/an
A. Self-interest threat
B. Self-review threat.
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 C. Intimidation threat
D. Advocacy threat

79. What threat to independence may be created if fees due from an assurance
client for professional services remain unpaid for a long time,
especially if a significant part is not paid before the issue of the
assurance report for the following year?
A. Advocacy threat
B. Self-interest threat
C. Intimidation threat
D. Self-review threat

80. These are fees calculated on a predetermined basis relating to the

outcome or result of a transaction or the result of the work performed.
A. Contingent fees
B. Fixed fees
C. Predetermined fees
D. Commissions.

81. Which of the following threats to independence may be created when

litigation takes place, or appears likely, between the firm or a member
of the assurance team the assurance client?
A. Self-interest or advocacy threat
B. Advocacy or intimidation threat
C. Self-interest or intimidation threat
D. Familiarity or self-review threat

82. As defined in the Code of Ethics, __________ is the communication to the

public of information as to the services or skills provided by
professional accountants in public practice with a view to procuring
professional business.
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services

83. As defined in the Code of Ethics, __________ is the communication to the

public of facts about a professional accountant which are not designed
for the deliberate promotion of that professional accountant.
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services

84. Which of the following statements concerning publicity is incorrect?

A. Booklets and other documents bearing the name of a professional
accountant and giving technical information for the assistance of
staff or clients may be issued to such persons, other professional
accountants or other interested parties.
B. Professional accountants who author books or articles on professional
subjects may state their name and professional qualifications; give
the name of their organization; and give any information as to the
services that the firm provides.
C. Appropriate newspapers or magazines may be used to inform the public
of the establishment of a new practice, of changes in the composition
of a partnership of professional accountants in public practice, or
of any alteration in the address of a practice.
D. A professional accountant may develop and maintain a website in the
Internet in such suitable length and style which may also include
announcements, press releases, publications and such other necessary
and factual information.

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85. The holding of media-covered events undertaken only to commemorate a
professional accountant’s anniversaries in public practice does not
violate the rules on advertising and solicitation provided that such
undertaking should be done only every _____ years of celebration.
A. 5
B. 10
C. 20
D. 25

86. A professional accountant in public practice is allowed to

A. Refer to, use or cite actual or purported testimonials by third
parties.
B. Publish services in billboard (e.g., tarpaulin, streamers, etc.)
advertisements.
C. Publish and compare fees with other CPAs or CPA firms or compare
those services with those provided by another firm or CPA
practitioner.
D. Inform interested parties through any medium that a partnership or
salaried employment of an accountancy nature is being sought.

87. After evaluating the significance of the threat created by an actual or

threatened litigation, the following safeguards should be applied to
reduce the threat to an acceptable level, except
A. Disclosing to the audit committee, or others charged with governance,
the extent and nature of the litigation.
B. If the litigation involves a member of the assurance team, removing
that individual from the assurance team.
C. Involving an additional professional accountant in the firm who was
not a member of the assurance team to review the work or otherwise
advise as necessary.
D. Withdraw from, or refuse to accept, the assurance engagement.

88. When a firm obtains an assurance engagement at a significantly lower fee

level than that charged by the predecessor firm, or quoted by other
firms, the self-interest threat created will not be reduced to an
acceptable level unless
I. The firm is able to demonstrate that appropriate time and qualified
staff are assigned to the task.
II. All applicable assurance standards,
guidelines, and quality control procedures are being complied with.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

89. What threat to independence may be created when the fees generated by
the assurance client represent a large proportion of the revenue of an
individual of the firm?
A. Self-review threat
B. Familiarity threat
C. Self-interest threat
D. Advocacy threat

90. The following statements relate to the provision of legal services to an

audit client. Which is incorrect?
A. The provision of legal services to an audit client involving matters
that would not be expected to have a material effect on the financial
statements may create a self-review threat.
B. Legal services to support an audit client in the execution of a
transaction (e.g., contract support) may create a self-review threat.

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 C. Acting for an audit client in the resolution of a dispute or
litigation in such circumstances when the amounts involved are
material in relation to the financial statements of the audit client
would create advocacy and self-review threats so significant no
safeguards could reduce the threats to an acceptable level.
D. The appointment of a partner or an employee of the firm or network
firm as General Counsel for legal affairs to an audit client would
create self-review and advocacy threats that are so significant no
safeguards could reduce the threats to an acceptable level.

91. When a close family member of a member of the assurance team is a

director, an officer, or an employee of the assurance client in a
position to exert direct and significant influence over the subject
matter information of the assurance engagement, threats to independence
may be created. If the threats are other than clearly insignificant,
which of the following safeguards can be applied to reduce the threats
to an acceptable level?
I. Removing the individual from the assurance team.
II. Where possible, structuring the responsibility of the assurance team
so that the professional does not deal with matters that are within
the responsibility of the close family member.
III. Policies and procedures to empower staff
to communicate to senior levels within the firm any issue of
independence and objectivity that concerns them.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III

92. Which of the following threats to independence may be created by family

and personal relationships between a member of the assurance team and a
director, an officer, or an employee of the assurance client in a
position to exert direct and significant influence over the subject
matter information of the assurance engagement?
A. Self-interest, familiarity or intimidation threats
B. Self-review, familiarity, or advocacy threats
C. Advocacy, familiarity or self-review threats
D. Self-interest, advocacy or self-review threats

93. The following circumstances create advocacy threats for a professional

accountant in public practice except
A. Promoting shares in an audit client.
B. Acting as an advocate on behalf of an audit client in litigation or
disputes with third parties.
C. Acting as campaign manager for the president of a client who is
running for a public office.
D. A member of the assurance team having a significant close business
relationship with an assurance client.

94. Which of the following are elements of a CPA firm’s quality control that
should be considered in establishing its quality control policies and
procedures?
Ethical Human Engagement
Requirements Resources Performance
A. No Yes No
B. Yes No No
C. Yes Yes Yes
D. No No Yes

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95. The primary purpose of establishing quality control policies and
procedures for deciding whether to accept a new client is to
A. Anticipate before performing any fieldwork whether an unqualified
opinion can be expressed.
B. Enable the CPA firm to attest to the reliability of the client.
C. Satisfy the CPA firm’s duty to the public concerning the acceptance
of new clients.
D. Minimize the likelihood of association with clients whose management
lacks integrity.

96. As defined in PSQC 1, __________ is a process comprising an ongoing

consideration and evaluation of the firm’s system of quality control,
including a periodic inspection of a selection of completed engagements,
designed to provide the firm with reasonable assurance that its system
of quality control is operating effectively.
A. Monitoring
B. Inspection
C. Engagement quality control review
D. Supervision

97. Which element of a system of quality control is addressed by the

establishment of policies and procedures designed to provide the firm
with reasonable assurance that it has sufficient personnel with the
competence, capabilities, and commitment to ethical principles?
A. Monitoring
B. Leadership responsibilities for quality within the firm
C. Human resources
D. Engagement performance

98. The nature, timing, and extent of an audit firm’s quality control
policies and procedures depend on
The Nature Appropriate
The CPA of the CPA Cost-Benefit
Firm’s Size Firm’s Practice Considerations
A. Yes Yes No
B. Yes Yes Yes
C. No No No
D. Yes No Yes

99. For audits of financial statements of listed entities, the engagement

partner should not issue the auditor’s report until the completion of
the
A. Engagement Quality Control Review
B. Management Review
C. Engagement Team Review
D. Engagement Partner Review

100. Who should take responsibility for the overall quality on each audit
engagement?
A. Engagement quality control reviewer
B. Engagement partner
C. Engagement team
D. CPA firm

101. The engagement partner should take responsibility for the direction,
supervision, and performance of the audit engagement in compliance with
professional standards and regulatory and legal requirements, and for
the auditor’s report that is issued to be appropriate in the
circumstances. Supervision includes the following, except
A. Tracking the progress of the audit engagement.

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 B. Addressing significant issues arising during the audit engagement,
considering their significance, and modifying the planned approach
appropriately.
C. Informing the members of the engagement team of their
responsibilities.
D. Identifying matters for consultation or consideration by more
experienced engagement team members during the audit engagement.

102. PSA 220 requires the engagement partner to consider whether members of
the engagement team have complied with the ethical requirements relating
to audit engagements. The Code of Ethics establishes the fundamental
principles of professional ethics, which include
I. Integrity
II. Objectivity
III. Professional competence and due care
IV. Confidentiality
V. Professional behavior
A. I, II, IV, and V only C. I, III, IV, and V only
B. II, III, IV, and V only D. I, II, III, IV, and V

THE FINANCIAL STATEMENT AUDIT: CLIENT ACCEPTANCE AND PLANNING

103. Which of the following would an auditor most likely use in determining
the auditor’s preliminary judgment about materiality?
A. The anticipated sample size of the planned substantive tests.
B. The entity’s annualized interim financial statements.
C. The results of the internal control questionnaire.
D. The contents of the management representation letter.

104. The auditor is required to determine three different levels of

materiality: (1) materiality for the financial statements as a whole,
(2) performance materiality, and (3)
A. Overall materiality
B. Planning materiality
C. General materiality
D. Specific materiality

105. Which of the following statements concerning materiality is not correct?

A. When establishing the overall audit strategy, the auditor shall
determine materiality for the financial statements as a whole.
B. If, in the specific circumstances of the entity, there is one or more
particular classes of transactions, account balances or disclosures
for which misstatements of lesser amounts than materiality for the
financial statements as a whole could reasonably be expected to
influence the economic decisions of users taken on the basis of the
financial statements, the auditor shall also determine the
materiality level or levels to those particular classes of
transactions, account balances or disclosures.
C. Determining materiality involves the exercise of professional
judgment.
D. The materiality level for the financial statements as a whole
determined in the planning stage of the audit should not be affected
by changes in the circumstances of the engagement.

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

A. Reducing the scope of tests of controls and substantive tests.
B. Providing assurance that potential material misstatements will be
identified.
C. Enhancing the auditor’s understanding of the client’s business and
identifying areas of potential risk.
D. Assessing the adequacy of the available evidential matter.

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107. Which of the following would not be considered an analytical procedure?
A. Estimating payroll expense by multiplying the number of employees by
the average hourly wage rate and the total hours worked.
B. Projecting an error rate by comparing the results of a statistical
sample with the actual population characteristics.
C. Computing accounts receivable turnover by dividing credit sales by
the average net receivables.
D. Developing the expected sales based on the sales trend of the prior
five years.

108. 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.

109. Which of the following most likely would indicate the existence of
related parties?
A. Writing down obsolete inventory just before year-end.
B. Failing to correct previously identified internal control
deficiencies.
C. Depending on a single product for the success of the entity.
D. Borrowing money at an interest rate significantly below the market
rate.

110. Which of the following is an incorrect statement concerning the

relationship of the internal auditor and the scope of the external audit
of an entity’s financial statements?
A. The external auditor is not required to give consideration to the
internal audit function beyond obtaining a sufficient understanding
to identify and assess the risks of material misstatement of the
financial statements and to design and perform further audit
procedures.
B. The internal auditors may determine the extent to which audit
procedures should be employed by the external auditor.
C. Under certain circumstances, the internal auditors may assist the
external auditor in performing substantive tests and tests of
controls.
D. The nature, timing, and extent of the external auditor’s substantive
tests may be affected by the work of internal auditors.

111. If the results of the auditor’s expert’s work do not provide sufficient
appropriate audit evidence or are not consistent with other audit
evidence, the auditor should
A. Report the matter to the appropriate regulatory agency of the
government.
B. Resolve the matter.
C. Withdraw from the engagement.
D. Express an unqualified opinion with reference to the work of the
expert.

112. Which of the following matters should be considered by the auditor in

developing the overall audit strategy?
A. Important characteristics of the entity, its business, its financial
performance and its reporting requirements including changes since
the date of the prior audit.

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 B. Conditions requiring special attention, such as the existence of
related parties.
C. The setting of materiality levels for audit purposes.
D. All of the above.

RISK ASSESSMENTS AND INTERNAL CONTROL

113. A measure of how willing the auditor is to accept that the financial
statements may be materially misstated after the audit is completed and
an unmodified opinion has been issued is the
A. Inherent risk.
B. Acceptable audit risk.
C. Control risk.
D. Detection risk.

114. When inherent risk is high, there will need to be

A lower More evidence
assessment of audit risk. accumulated by the auditor.
A. Yes Yes
B. No No
C. Yes No
D. No Yes

115. 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.

116. Which of the following are considered control environment elements?

Commitment Detection Organizational
to Competence Risk Structure
A. No Yes No
B. Yes Yes Yes
C. Yes No Yes
D. No No Yes

117. Which of the following statements concerning the relevance of various

types of controls to a financial statement audit is correct?
A. All controls are ordinarily relevant to a financial statement audit.
B. Controls over safeguarding of assets and liabilities are of primary
importance, while controls over the reliability of financial
reporting may also be relevant.
C. Controls over the reliability of financial reporting are ordinarily
most directly relevant to a financial statement audit, but other
controls may also be relevant.
D. An auditor may ordinarily ignore a consideration of controls when a
substantive audit approach is taken.

118. An auditor should consider two key issues when obtaining an

understanding of a client’s internal controls. These issues are
A. The effectiveness and efficiency of the controls.
B. The frequency and effectiveness of the controls.
C. The design and implementation of the controls.
D. The implementation and efficiency of the controls.

119. Authorizations can be either general or specific. Which of the

following is not an example of a general authorization?
A. Automatic reorder points for raw materials inventory.
B. A sales manager’s authorization for a sales return.
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 C. Credit limits for various classes of transactions.
D. A sales price list for merchandise.

120. An auditor should obtain sufficient knowledge of an entity’s information

system, including the related business processes relevant to financial
reporting, to understand the
A. Policies used to detect the concealment of fraud.
B. Process used to prepare significant accounting estimates.
C. Safeguards used to limit access to computer facilities.
D. Procedures used to assure proper authorization of transactions.

121. Which of the following controls most likely would provide reasonable
assurance that all credit sales transactions of an entity are recorded?
A. The accounting department supervisor controls the mailing of monthly
statements to customers and investigates any differences reported by
customers.
B. The accounting department supervisor independently reconciles, on a
monthly basis, the accounts receivable subsidiary ledger to the
accounts receivable control account.
C. The billing department supervisor matches prenumbered shipping
documents with entries in the sales journal.
D. The billing department supervisor sends copies of approved sales
orders to the credit department for comparison to authorized credit
limits and current customer account balances.

122. Which of the following control activities in an entity’s revenue/receipt

cycle would provide reasonable assurance that all billed sales are
correctly posted to the accounts receivable ledger?
A. Each shipment of goods on credit is supported by a prenumbered sales
invoice.
B. The accounts receivable subsidiary ledger is reconciled daily to the
accounts receivable control account in the general ledger.
C. Daily sales summaries are compared to daily postings to the accounts
receivable ledger.
D. Each sales invoice is supported by a prenumbered shipping document.

123. Which of the following controls is not usually performed in the accounts
payable department?
A. Indicating on the voucher the affected asset and expense accounts to
be debited.
B. Approving vouchers for payment by having an authorized employee sign
the vouchers.
C. Accounting for unused prenumbered purchase orders and receiving
reports.
D. Matching the vendor’s invoice with the related purchase requisition,
purchase order, and receiving report.

124. Which of the following is of least concern to an auditor in assessing

the risks of material misstatement?
A. Signed checks are distributed by the controller to approved payees.
B. Checks are signed by one person.
C. Cash receipts are not deposited intact daily.
D. Treasurer does not verify the names and addresses of check payees.

125. Your client, a merchandising concern, has annual sales of P30,000,000

and a 40% gross profit rate. Tests reveal that 2% of the peso amount of
purchases do not get into inventory because of breakage and inventory
pilferage by employees. The company estimates that these losses could
be reduced to 0.5% of purchases by designing and implementing certain
controls costing approximately P350,000. Should the controls be
designed and implemented?

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 A. Yes, regardless of cost-benefit considerations, because the situation
involves employee theft.
B. Yes, because the ideal system of internal control is the most
extensive one.
C. No, because the cost of designing and implementing the added controls
exceeds the projected savings.
D. Yes, because the expected benefits to be derived exceed the cost of
the added controls.

126. After gaining an understanding of internal control and assessing the

risks of material misstatement, an auditor decided to perform tests of
controls. The auditor most likely decided that
A. Additional evidence to support a further reduction in control risk is
not available.
B. It is not possible or practicable to reduce the risks of material
misstatement at the assertion level to an acceptably low level with
audit evidence obtained only from substantive test procedures.
C. There were many internal control weaknesses that could allow
misstatements to enter the accounting system.
D. An increase in the assessed level of control risk is justified for
certain financial statement assertions.

127. An auditor may decide to assess control risk at the maximum level for
certain assertions because the auditor believes
A. Controls are unlikely to pertain to the assertions.
B. The entity’s control components are interrelated.
C. Sufficient appropriate audit evidence to support the assertions is
likely to be available.
D. More emphasis on tests of controls than substantive tests is
warranted.

128. Which of the following statements is correct concerning an auditor’s

assessment of control risk?
A. Assessing control risk may be performed concurrently during an audit
with obtaining an understanding of the entity’s internal control.
B. Evidence about the operation of controls in prior audits may not be
considered during the current year’s assessment of control risk.
C. The basis for an auditor’s conclusions about the assessed level of
control risk need not be documented unless control risk is assessed
at the maximum level.
D. The lower the assessed level of control risk, the less assurance the
evidence must provide that the controls are operating effectively.

129. According to PSA 330 (The Auditor’s Procedures in Response to Assessed

Risks), an auditor who plans to rely on controls that have not changed
since they were last tested should test the operating effectiveness of
such controls at least once every
A. Second audit
B. Third audit
C. Fourth audit
D. Fifth audit

130. In performing tests of the operating effectiveness of an entity’s

controls, an auditor selects from a variety of techniques, including
A. Reperformance and observation.
B. Inquiry and analytical procedures.
C. Comparison and confirmation.
D. Inspection and verification.

131. An auditor intends to perform tests of control on a client’s cash

disbursements procedures. If the control procedures leave no audit

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 trail of documentary evidence, the auditor most likely will test the
procedures by
A. Inquiry and analytical procedures.
B. Inquiry and observation.
C. Analytical procedures and confirmation.
D. Confirmation and observation.

132. Which of the following tests of controls most likely would help assure
an auditor that goods shipped are properly billed?
A. Scan the sales journal for sequential and unusual entries.
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable ledger to daily sales summaries.
D. Inspect unused sales invoices for consecutive prenumbering.

133. 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.

FRAUD AND ERROR

134. Misstatements in the financial statements can arise from fraud or error.
The distinguishing factor between fraud and error is whether the
underlying action that results in the misstatement of the financial
statements is
I. Intentional or unintentional.
II. Rational or irrational.
A. I only C. Both I and II
B. II only D. Neither I nor II.

135. “Error” includes

A. Engaging in complex transactions that are structured to misrepresent
the financial position or financial performance of the entity.
B. Concealing, or not disclosing, facts that could affect the amounts
recorded in the financial statements.
C. An incorrect accounting estimate arising from oversight or
misinterpretation of facts.
D. Intentional misapplication of accounting policies relating to
amounts, classification, manner of presentation, or disclosure.

136. Fraud involving one or more members of management or those charged with
governance is referred to as
A. Management fraud. C. Fraudulent financial reporting.
B. Employee fraud. D. Misappropriation of assets.

137. The auditor is concerned with fraud that causes a material misstatement
in the financial statements. There are two types of intentional
misstatements that are relevant to the auditor: misstatements resulting
from fraudulent financial reporting and misstatements resulting from
A. Management fraud.
B. Employee fraud.
C. Misappropriation of assets.
D. Collusion within the entity or with third parties.

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138. Fraudulent financial reporting involves intentional misstatements
including omissions of amounts or disclosures in financial statements to
deceive financial statement users. It may be accomplished in a number
of ways, including
A. Embezzling receipts.
B. Stealing physical assets or intellectual property.
C. Using an entity’s assets for personal use.
D. Manipulation, falsification, or alteration of accounting records or
supporting documentation from which the financial statements are
prepared.

139. Which of the following conditions are generally present when

misstatements due to fraud occur?
I. Incentive or pressure.
II. Perceived opportunity.
III. Rationalization.
A. I and II only. C. I and III only.
B. II and III only. D. I, II, and III.

140. The primary responsibility for the prevention and detection of fraud
rests with
A. Those charged with governance of the entity.
B. Management of the entity.
C. Both those charged with governance of the entity and management.
D. The auditor.

141. Which of the following statements best describes an auditor’s

responsibility regarding misstatements?
A. An auditor should obtain reasonable assurance that the financial
statements taken as a whole are free from material misstatement,
whether caused by fraud or error.
B. An auditor should obtain absolute assurance that material
misstatements in the financial statements will be detected.
C. An auditor is responsible to detect material errors but has no
responsibility to detect material fraud that is concealed through
employee collusion or management override of internal control.
D. An auditor’s failure to detect a material misstatement resulting from
fraud is an indication of noncompliance with the requirements of the
Philippine Standards on Auditing (PSAs).

142. When obtaining an understanding of the entity and its environment,

including its internal control, the auditor may identify events or
conditions that indicate an incentive or pressure to commit fraud or
provide an opportunity to commit fraud. Such events or conditions are
referred to as
A. Fraud conditions. C. Fraudulent activities.
B. Fraud risk factors. D. Fraud environment.

143. The following are examples of fraud risk factors relating to

misstatements arising from misappropriation of assets, except
A. Recurring negative cash flows from operating activities while
reporting earnings and earnings growth.
B. Inadequate physical safeguards over cash, investments, inventory, or
fixed assets.
C. Inadequate segregation of duties or independent checks.
D. Adverse relationship between the entity and employees with access to
cash or other assets susceptible to theft created by recent changes
made to employee compensation or benefit plans.

144. Opportunities to misappropriate assets increase when there are

A. Known or anticipated future employee layoffs.

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 B. Promotions, compensation, or other rewards inconsistent with
expectations.
C. Recent or anticipated changes to employee compensation or benefit
plans.
D. Inventory items that are small in size, of high value, or in high
demand.

145. Which of the following conditions or events may create

incentives/pressures to commit fraud?
A. Inadequate system of authorization and approval of transactions.
B. Lack of mandatory vacations for employees performing key control
functions.
C. Excessive pressure on management or operating personnel to meet
financial targets established by those charged with governance,
including sales or profitability incentive goals.
D. Inadequate access controls over automated records.

146. Because of the risk of material misstatement, an audit of financial

statements in accordance with PSAs should be planned and performed with
an attitude of
A. Impartial conservatism.
B. Objective judgment.
C. Independent integrity.
D. Professional skepticism.

147. When planning the audit, the auditor should make inquiries of
management. Such inquiries should address the following, except
A. Management’s assessment of the risk that the financial statements may
be misstated due to fraud.
B. Management’s process for identifying and responding to the risks of
fraud in the entity.
C. Management’s consideration of how an element of unpredictability will
be incorporated into the nature, timing, and extent of the audit
procedures to be performed.
D. Management’s communication, if any, to those charged with governance
regarding its processes for identifying and responding to the risks
of fraud in the entity.

148. When the auditor identifies a misstatement in the financial statements,

the auditor should consider whether such a misstatement may be
indicative of fraud and if there is such an indication, the auditor
should
A. Consider the implications of the misstatement in relation to other
aspects of the audit.
B. Withdraw from the engagement.
C. Communicate the information to regulatory and enforcement
authorities.
D. Report the matter to the person or persons who made the audit
appointment.

AUDITING IN A CIS/IT ENVIRONMENT

149. The use of a computer changes the processing, storage, and communication
of financial information. A CIS environment may affect the following,
except
A. The accounting and internal control systems of the entity.
B. The overall objective and scope of an audit.
C. The auditor’s design and performance of tests of control and
substantive procedures to satisfy the audit objectives.
D. The specific procedures to obtain knowledge of the entity’s
accounting and internal control systems.
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150. The following are benefits of using IT-based controls, except
A. Ability to process large volume of transactions.
B. Over-reliance on computer-generated reports.
C. Ability to replace manual controls with computer-based controls.
D. Reduction in misstatements due to consistent processing of
transactions.

151. Which of the following statements concerning the Internet is incorrect?

A. The Internet is a shared public network that enables communication
with other entities and individuals around the world.
B. The Internet is a private network that only allows access to
authorized persons or entities.
C. The Internet is interoperable, which means that any computer
connected to the Internet can communicate with any other computer
connected to the Internet.
D. The Internet is a worldwide network that allows entities to engage in
e-commerce/e-business activities.

152. In planning the portions of the audit which may be affected by the
client’s CIS environment, the auditor should obtain an understanding of
the significance and complexity of the CIS activities and the
availability of data for use in the audit. The following relate to the
complexity of CIS activities except when
A. Transactions are exchanged electronically with other organizations
(for example, in electronic data interchange systems [EDI]).
B. Complicated computations of financial information are performed by
the computer and/or material transactions or entries are generated
automatically without independent validation.
C. Material financial statement assertions are affected by the computer
processing.
D. The volume of transactions is such that users would find it difficult
to identify and correct errors in processing.

153. The auditor shall consider the entity’s CIS environment in designing
audit procedures to reduce risk to an acceptably low level. Which of
the following statements is incorrect?
A. The auditor’s specific audit objectives do not change whether
financial information is processed manually or by computer.
B. The methods of applying audit procedures to gather audit evidence are
not influenced by the methods of computer processing.
C. The auditor may use either manual audit procedures, computer-assisted
audit techniques (CAATs), or a combination of both to obtain
sufficient appropriate audit evidence.
D. In some CIS environments, it may be difficult or impossible for the
auditor to obtain certain data for inspection, inquiry, or
confirmation without the aid of a computer.

154. A characteristic that distinguishes computer processing from manual

processing is
A. The potential for systematic error is ordinarily greater in manual
processing than in computerized processing.
B. Errors or fraud in computer processing will be detected soon after
their occurrences.
C. Most computer systems are designed so that transaction trails useful
for audit purposes do not exist.
D. Computer processing virtually eliminates the occurrence of
computational errors normally associated with manual processing.

155. Which of the following statements most likely represents a disadvantage

for an entity that maintains data files on personal computers (PCs)
rather than manually prepared files?
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 A. It is usually more difficult to compare recorded accountability with
the physical count of assets.
B. Random error associated with processing similar transactions in
different ways is usually greater.
C. Attention is focused on the accuracy of the programming process
rather than errors in individual transactions.
D. It is usually easier for unauthorized persons to access and alter the
files.

156. The internal controls over computer processing include both manual
procedures and procedures designed into computer programs (programmed
control procedures). These manual and programmed control procedures
comprise the general CIS controls and CIS application controls. The
purpose of general CIS controls is to
A. Establish specific control procedures over the accounting
applications in order to provide reasonable assurance that all
transactions are authorized and recorded and are processed
completely, accurately, and on a timely basis.
B. Establish a framework of overall controls over the CIS activities and
to provide a reasonable level of assurance that the overall
objectives of internal control are achieved.
C. Provide reasonable assurance that systems are developed and
maintained in an authorized and efficient manner.
D. Provide reasonable assurance that access to data and computer
programs is restricted to authorized personnel.

157. An entity has recently converted its purchasing cycle from a manual
process to an online computer system. Which of the following is a
probable result associated with conversion to the new IT system?
A. Traditional duties are less separated.
B. Increased processing time.
C. Reduction in the entity’s risk exposure.
D. Increased processing errors.

158. An entity should plan the physical location of its computer facility.
Which of the following is the primary consideration for selecting a
computer site?
A. It should be in the basement or on the ground floor.
B. It should maximize the visibility of the computer.
C. It should minimize the distance that data control personnel must
travel to deliver data and reports and be easily accessible by a
majority of company personnel.
D. It should provide security.

159. An entity installed antivirus software on all its personal computers.

The software was designed to prevent initial infections, stop
replication attempts, detect infections after their occurrence, mark
affected system components, and remove viruses from infected components.
The major risk in relying on antivirus software is that it may
A. Consume too many system resources.
B. Interfere with system operations.
C. Not detect certain viruses.
D. Make software installation too complex.

AUDIT OBJECTIVES, PROCEDURES, EVIDENCE, AND DOCUMENTATION

160. Which of the following should be considered by the auditor in deciding

which means (or combination of means) to use in selecting items for
testing?
I. The risk of material misstatement related to the assertion being
tested.
II. Audit efficiency.
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 A. I only C. Both I and II
B. II only D. Neither I nor II

161. The quantity of audit evidence needed is affected by the risk of

misstatement and also by the quality of such audit evidence.
The reliability of audit evidence is influenced by its source and by its
nature and is dependent on the individual circumstances under which it
is obtained.
A. Both statements are true. C. True; False.
B. Both statements are false. D. False; True.

162. Which of the following is a false statement about audit objectives?

A. There should be a one-to-one relationship between audit objectives
and procedures.
B. Audit objectives should be developed in light of management
assertions about the financial statement components.
C. Selection of tests to meet audit objectives should depend upon the
understanding of internal control.
D. The auditor should resolve any substantial doubt about any of
management’s material financial statement assertions.

163. Which of the following statements concerning evidential matter is true?

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

164. Which of the following types of audit evidence is the most persuasive?
A. Prenumbered purchase order forms.
B. Client worksheets supporting cost allocations.
C. Bank statements obtained from the client.
D. Client representation letter.

165. Which of the following generalizations does not relate to the

appropriateness of evidence?
A. Audit evidence from external sources (for example, confirmation
received from a third party) is more reliable than that generated
internally.
B. An auditor’s opinion, to be economically useful, is formed within
reasonable time and based on evidence obtained at a reasonable cost.
C. Audit evidence generated internally is more reliable when the related
accounting and internal control systems are effective.
D. Audit evidence obtained directly by the auditor is more reliable than
that obtained from the entity.

166. Each of the following might, by itself, form a valid basis for an
auditor to decide to omit a test except for the
A. Difficulty and expense involved in testing a particular item.
B. Assessment of control risk at a low level.
C. Inherent risk involved.
D. Relationship between the cost of obtaining evidence and its
usefulness.

167. 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.
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 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.

168. Which of the following statements is correct concerning the use of

negative confirmation requests?
A. Unreturned negative confirmation requests rarely provide significant
explicit evidence.
B. Negative confirmation requests are effective when detection risk is
low.
C. Unreturned negative confirmation requests indicate that alternative
procedures are necessary.
D. Negative confirmation requests are effective when understatements of
account balances are suspected.

169. Which of the following most likely would give the most assurance
concerning the valuation and allocation assertion of accounts
receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping
documents.
B. Comparing receivable turnover ratios with industry statistics for
reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for uncollectible accounts for
reasonableness.

170. Confirmation is “the process of obtaining and evaluating a direct

communication from a third party in response to a request for
information about a particular item affecting financial statement
assertions.” Two assertions for which confirmation of accounts
receivable balances provides primary evidence are
A. Completeness and valuation
B. Valuation and rights and obligations
C. Rights and obligations and existence
D. Existence and completeness

171. To gain assurance that all inventory items in a client’s inventory

listing schedule are valid, an auditor most likely would vouch
A. Inventory tags noted during the auditor’s observation to items listed
in the inventory listing schedule.
B. Inventory tags noted during the auditor’s observation to items listed
in receiving reports and vendors’ invoices.
C. Items listed in the inventory listing schedule to inventory tags and
the auditor’s recorded count sheets.
D. Items listed in receiving reports and vendors’ invoices to the
inventory listing schedule.

172. An auditor selected items for test counts while observing a client’s
physical inventory. The auditor then traced the test counts to the
client’s inventory listing. This procedure most likely obtained
evidence concerning management’s assertion of
A. Rights and obligations C. Existence
B. Completeness D. Valuation

173. Which of the following is an audit procedure that an auditor most likely
would perform concerning litigation, claims, and assessments?

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 A. Request the client’s lawyer to evaluate whether the client’s pending
litigation, claims, and assessments indicate a going concern problem.
B. Examine the legal documents in the client’s lawyer’s possession
concerning litigation, claims, and assessments to which the lawyer
has devoted substantive attention.
C. Discuss with management its policies and procedures adopted for
evaluating and accounting for litigation, claims, and assessments.
D. Confirm directly with the client’s lawyer that all litigation,
claims, and assessments have been recorded or disclosed in the
financial statements.

174. Which of the following is not an audit procedure that the independent
auditor would perform with respect to litigation, claims, and
assessments?
A. Inquire of and discuss with management the policies and procedures
adopted for litigation, claims, and assessments.
B. Obtain from management a description and evaluation of litigation,
claims, and assessments that existed at the balance sheet date.
C. Obtain assurance from management that if has disclosed all unasserted
claims that the lawyer has advised are probable of assertion and must
be disclosed.
D. Confirm directly with the client’s lawyer that all claims have been
recorded in the financial statements.

175. The following are ordinarily excluded from audit documentation:

A B C D
Superseded drafts of working papers and financial
statements Yes No No Yes
Notes that reflect incomplete or preliminary thinking Yes Yes No
No
Previous copies of documents corrected for
typographical or other errors Yes Yes Yes Yes
Duplicates of documents Yes No Yes No

176. Audit documentation may be recorded on paper or on electronic or other

media. The following are examples of audit documentation, except
A. Audit programs
B. Letters of confirmation and representation
C. Correspondence (including e-mail) concerning significant matters
D. The entity’s accounting records

177. The completion of the assembly of the final audit file after the date of
the auditor’s report does not ordinarily involve
A. The performance of new audit procedures or the drawing of new
conclusions.
B. Sorting, collating and cross-referencing working papers.
C. Deleting or discarding superseded documentation.
D. Signing off on completion checklists relating to the file assembly
process.

AUDIT SAMPLING

178. Audit sampling involves the

A. Selection of all items over a certain amount.
B. Application of audit procedures to less than 100% of items within a
class of transactions or an account balance such that all items have
a chance of selection.
C. Application of audit procedures to all items that comprise a class of
transactions or an account balance.
D. Application of audit procedures to all items over a certain amount
and those that are unusual or have a history of error.
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179. Population, as defined in PSA 530, means the entire set of data from
which a sample is selected and about which the auditor wishes to draw
conclusions. It is important for the auditor to ensure that the
population is
I. Appropriate to the objective of the audit procedure.
II. Complete.
A. I only C. Both I and II
B. II only D. Neither I nor II

180. An advantage of statistical over nonstatistical sampling methods in

tests of controls is that the statistical methods
A. Afford greater assurance than a nonstatistical sample of equal size.
B. Provide an objective basis for quantitatively evaluating sampling
risks.
C. Can more easily convert the sample into a dual-purpose test useful
for substantive testing.
D. Eliminate the need to use judgment in determining appropriate sample
sizes.

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

182. Which of the following statistical selection techniques is least

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

183. Which of the following combinations results in a decrease in sample size

in a sample for attributes?
Risk of Expected
assessing Tolerable population
control risk too low rate deviation rate
A. Increase Decrease Increase
B. Decrease Increase Decrease
C. Increase Increase Decrease
D. Increase Increase Increase

184. The diagram below depicts the auditor’s estimated maximum deviation rate
compared with the tolerable rate and also depicts the true population
deviation rate compared with the tolerable rate.
True State of Population
Auditor’s
Estimate Deviation Rate Deviation Rate
Based on Is less than Exceeds
Sample Results Tolerable Rate Tolerable Rate

Maximum
Deviation Rate I. III.
Is Less than
Tolerable Rate

Maximum
Deviation Rate II. IV.
Page 31 of 59
 Exceeds
Tolerable Rate

As a result of tests of controls, the auditor assesses control risk

higher than necessary and thereby increases substantive testing. This
is illustrated by
A. I C. III
B. II D. IV

COMPLETING THE AUDIT AND POST-AUDIT RESPONSIBILITIES

185. 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.

186. 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. The communication with the audit committee should be revised.
B. Irregularities exist among the relevant account balances.
C. Additional substantive tests of details are required.
D. Internal control activities are not operating effectively.

187. The auditor should review information provided by those charged with
governance and management identifying
I. The names of all known related parties.
II. Related party transactions.
A. I only. C. Both I and II.
B. II only. D. Neither I nor II.

188. Which of the following events most likely indicates the existence of
related parties?
A. Making a loan without scheduled terms for 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.

189. An auditor searching for related party transactions should obtain an

understanding of each subsidiary’s relationship to the total entity
because
A. This may permit the audit of intercompany account balances to be
performed as of concurrent dates.
B. This may reveal whether particular transactions would have taken
place if the parties had not been related.
C. The business structure may be deliberately designed to obscure
related party transactions.
D. Intercompany transactions may have been consummated on terms
equivalent to arm’s-length transactions.

190. After determining that a related party transaction has, in fact,

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

191. As used in PSA 560 (Subsequent Events), the term “subsequent events”
refers to
I. Events occurring between the date of the financial statements and the
date of the auditor’s report.
II. Facts discovered after the date of the
auditor’s report.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

192. Which of the following statements best describes the “date of the
financial statements?”
A. The date on which those with the recognized authority assert that
they have prepared the entity’s complete set of financial statements,
including the related notes, and that they have taken responsibility
for them.
B. The date that the auditor’s report and audited financial statements
are made available to third parties.
C. The date of the end of the latest period covered by the financial
statements, which is normally the date of the most recent balance
sheet in the financial statements subject to audit.
D. The date on which the auditor has obtained sufficient appropriate
audit evidence on which to base the opinion on the financial
statements.

193. Which of the following procedures would an auditor most likely perform
to obtain evidence about the occurrence of subsequent events?
A. Inquiring as to whether any unusual adjustments were made after the
date of the financial statements.
B. Confirming a sample of material accounts receivable established after
the date of the financial statements.
C. Comparing the financial statements being reported on with those of
the prior period.
D. Investigating personnel changes in the accounting department
occurring after the date of the financial statements.

194. Which of the following statements best expresses the auditor’s

responsibility with respect to facts discovered after the date of the
auditor’s report but before the date the financial statements are
issued?
A. The auditor should amend the financial statements.
B. If the facts discovered will materially affect the financial
statements, the auditor should issue a new report which contains
either a qualified opinion or an adverse opinion.
C. The auditor should consider whether the financial statements need
amendment, discuss the matter with management, and consider taking
actions appropriate in the circumstances.
D. The auditor should withdraw from the engagement.

195. After issuing a report, an auditor has no obligation to make continuing

inquiries or perform other procedures concerning the audited financial
statements, unless
A. Final determinations or resolutions are made of contingencies that
had been disclosed in the financial statements.
B. Information about an event that occurred after the date of the
auditor’s report comes to the auditor’s attention.
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 C. The control environment changes after issuance of the report.
D. Information, which existed at the report date and may affect the
report, comes to the auditor’s attention.

196. 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. A technological development that could affect the entity’s future
ability to continue as a going concern.
B. The entity’s sale of a subsidiary that accounts for 30% of the
entity’s consolidated sales.
C. The discovery of information regarding a contingency that existed
before the financial statements were issued.
D. The final resolution of a lawsuit disclosed in the notes to the
financial statements.

197. PSA 570 (Going Concern) states that a fundamental principle in the
preparation of financial statements is the going concern assumption.
Under this assumption, an entity is ordinarily viewed as continuing in
business for the foreseeable future with neither the intention nor the
necessity of liquidation, ceasing trading or seeking protection from
creditors pursuant to laws and regulations. The responsibility to make
an assessment of an entity’s ability to continue as a going concern
rests with the
A. Auditor
B. Entity’s management
C. SEC
D. Entity’s creditors

198. Which of the following statements best describes the auditor’s

responsibility concerning the appropriateness of the going concern
assumption in the preparation of the financial statements?
A. The auditor’s responsibility is to make a specific assessment of the
entity’s ability to continue as a going concern.
B. The auditor’s responsibility is to predict future events or
conditions that may cause the entity to cease to continue as a going
concern.
C. The auditor’s responsibility is to consider the appropriateness of
management’s use of the going concern assumption and consider whether
there are material uncertainties about the entity’s ability to
continue as a going concern that need to be disclosed in the
financial statements.
D. The auditor’s responsibility is to give a guarantee in the audit
report that the entity has the ability to continue as a going
concern.

199. 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. Research and development projects are postponed.

200. 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. Restrictions on the disposal of principal assets are present.
B. Usual trade credit from suppliers is denied.
C. Significant related party transactions are pervasive.
D. Arrearages in principal stock dividends are paid.

Page 34 of 59
201. Which of the following audit procedures would most likely assist an
auditor in identifying conditions and events that may indicate there
could be substantial doubt about an entity’s ability to continue as a
going concern?
A. Confirmation of bank balances.
B. Confirmation of accounts receivable from major customers.
C. Reconciliation of interest expense with debt outstanding.
D. Review of compliance with terms of debt agreements.

202. Harold, CPA, believes there is substantial doubt about the ability of
Jersamtan Co. to continue as a going concern for a reasonable period of
time. In evaluating Jersamtan’s plans for dealing with the adverse
effects of future conditions and events, Harold most likely would
consider, as a mitigating factor, Jersamtan’s plans to
A. Postpone expenditures for research and development projects.
B. Purchase production facilities currently being leased from a related
party.
C. Strengthen internal controls over cash disbursements.
D. Discuss with lenders the terms of all debt and loan agreements.

203. When an auditor concludes that there is substantial doubt about a

continuing audit client’s ability to continue as a going concern for a
reasonable period of time, the auditor’s responsibility is to
A. Consider the adequacy of disclosure about the client’s possible
inability to continue as a going concern.
B. Issue a qualified or adverse opinion, depending upon materiality, due
to the possible effects on the financial statements.
C. Report to the client’s audit committee that management’s accounting
estimates may need to be adjusted.
D. Reissue the prior year’s auditor’s report and add an emphasis of
matter paragraph that specifically refers to “substantial doubt” and
“going concern.”

204. The auditor is required to obtain audit evidence that management

I. Acknowledges its responsibility for the fair presentation of the
financial statements in accordance with applicable financial
reporting framework.
II. Has approved the financial statements.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

205. When an audit is made in accordance with generally accepted auditing

standards, the auditor should always
A. Observe the taking of physical inventory on the balance sheet date.
B. Obtain certain written representations from management.
C. Employ analytical procedures as substantive tests to obtain evidence
about specific assertions related to account balances.
D. Document the understanding of the client’s internal control and the
basis for all conclusions about the assessed level of control risk
for financial statement assertions.

206. When considering the use of management’s written representations as

audit evidence about the completeness assertion, an auditor should
understand that such representations
A. Constitute sufficient appropriate audit evidence to support the
assertion when considered in combination with a sufficiently low
assessed level of control risk.
B. Are not part of the audit evidence considered to support the
assertion.

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 C. Replace a low assessed level of control risk as audit evidence to
support the assertion.
D. Complement, but do not replace, substantive tests designed to support
the assertion.

207. A written representation from a client’s management that, among other

matters, acknowledges responsibility for the fair presentation of
financial statements, should normally be signed by the
A. Chief financial officer and the chair of the board of directors.
B. Chief executive officer and the chief financial officer.
C. Chief executive officer, the chair of the board of directors, and the
client’s lawyer.
D. Chair of the audit committee of the board of directors.

208. The date of the management representation letter should coincide with
the date of the
A. Statement of Financial Position
B. Latest related party transaction
C. Auditor’s report
D. Latest interim financial information

209. Which of the following statements concerning management representations

is incorrect?
A. Representations by management can be a substitute for other audit
evidence that the auditor could reasonably expect to be available.
B. If the auditor is unable to obtain sufficient appropriate audit
evidence regarding a matter, which has, or may have, a material
effect on the financial statements and such audit evidence is
expected to be available, this will constitute a limitation in the
scope of the audit, even if a representation from management has been
received on the matter.
C. If a representation by management is contradicted by other audit
evidence, the auditor should investigate the circumstances and, when
necessary, reconsider the reliability of other representations by
management.
D. The auditor’s working papers would ordinarily include a summary of
oral discussions with management or written representations from
management.

210. What type of opinion should be expressed if the client’s management

refuses to provide a representation that the auditor considers
necessary?
A. Qualified opinion or a disclaimer of opinion.
B. Qualified opinion or an adverse opinion.
C. Adverse opinion or a disclaimer of opinion.
D. Unqualified opinion.

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

claims, and assessments is the
A. Independent auditor
B. Client’s management
C. Court records
D. Client’s lawyer

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

213. The letter of audit inquiry should be

A. Prepared and sent by the auditor.
B. Prepared by management and sent by the auditor.
C. Prepared and sent by management.
D. Prepared by the auditor and sent by management.

214. The refusal of a client’s lawyer to provide a representation on the

legality of a particular act committed by the client is ordinarily
A. Proper grounds to withdraw from the engagement.
B. Insufficient reason to modify the auditor’s report because of the
lawyer’s obligation of confidentiality.
C. Considered to be a scope limitation.
D. Sufficient reason to issue a “subject to” opinion.

215. Management’s refusal to give the auditor permission to communicate with

the entity’s legal counsel is most likely to lead to
A. An adverse opinion.
B. A qualified opinion or an adverse opinion.
C. An unqualified opinion.
D. A qualified opinion or a disclaimer of opinion.

216. In which of the following circumstances would an auditor most likely

meet with the client’s legal counsel to discuss the likely outcome of
the litigation and claims?
I. The auditor determines that the matter is a significant risk.
II. There is a disagreement between
management and the entity’s legal counsel.
III. The subject matter of the litigation is
complex.
A. I and II only.
B. II and III only.
C. I and III only.
D. I, II, and III.

217. Which of the following statements extracted from a client’s lawyer’s

letter concerning litigation, claims, and assessments most likely would
cause the auditor to request clarification?
A. “I believe that the action can be settled for less than the damages
claimed.”
B. “I believe that the company will be able to defend this action
successfully.”
C. “I believe that the plaintiff’s case against the company is without
merit.”
D. “I believe that the possible liability to the company is nominal in
amount.”

218. The auditor should consider the status of legal matters up to the
A. Balance sheet date.
B. Date of the auditor’s report.
C. Date of approval of the financial statements.
D. Date of issuance of the financial statements.

THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS

219. The following statements relate to the date of the auditor’s report.
Which is false?
A. The auditor should date the report as of the completion date of the
audit.

Page 37 of 59
 B. The date of the auditor’s report should not be earlier than the date
on which the financial statements are signed or approved by
management.
C. The date of the auditor’s report should not be later than the date on
which the financial statements are signed or approved by management.
D. The date of the auditor’s report should always be later than the date
of the financial statements (i.e., the balance sheet date).

220. Inwhich of the following circumstances would an auditor most likely add
anemphasis of matter paragraph to the auditor’s report while expressing
anunqualified opinion?
A.There is a substantial doubt about the entity’s ability to continue
as a going concern.
B. Management’s estimates of the effects of future events are
unreasonable.
C. No depreciation has been provided in the financial statements.
D. Certain transactions cannot be tested because of management’s records
retention policy.

221. An independent auditor discovers that a payroll supervisor of the

company being audited has misappropriated P50,000. The company’s total
assets and income before tax are P70 million and P15 million,
respectively. Assuming no other issues affect the report, the auditor’s
report will most likely contain a/an
A. Unmodified opinion C. Adverse opinion.
B. Disclaimer of opinion D. Scope qualification

222. A note to the financial statements of the Prudent Bank indicates that
all of the records relating to the bank’s business operations are stored
on magnetic disks, and that no emergency backup systems or duplicate
disks are stored because the bank and its auditors consider the
occurrence of a catastrophe to be remote. Based upon this note, the
auditor’s report should express
A. A qualified opinion C. An adverse opinion
B. An unmodified opinion D. A “subject to” opinion
223. When would the auditor refer to the work of an appraiser in the
auditor’s report?
A. An adverse opinion is expressed based on a difference of opinion
between the client and the outside appraiser as to the value of
certain assets.
B. A disclaimer of opinion is expressed because of a scope limitation
imposed on the auditor by the appraiser.
C. A qualified opinion is expressed because of a matter unrelated to the
work of the appraiser.
D. An unqualified opinion is expressed and an emphasis of matter
paragraph is added to disclose the use of the appraiser’s work.

224. Which of the following terms is used in the standard to describe the
effects on the financial statements of misstatements or the possible
effects on the financial statements, if any, that are undetected due to
an inability to obtain sufficient appropriate audit evidence?
A. Persuasive C. Material
B. Pervasive D. Extensive

225. When audited financial statements are presented in a document (e.g.,

annual report) containing other information, the auditor
A. Should read the other information to consider whether it is
inconsistent with the audited financial statements.
B. Has no responsibility for the other information because it is not
part of the basic financial statements.
C. Has an obligation to perform auditing procedures to corroborate the
other information.
Page 38 of 59
 D. Is required to express a qualified opinion if the other information
has a material misstatement of fact.

226. An auditor concludes that there is a material inconsistency in the other

information in an annual report to shareholders containing audited
financial statements. If the auditor concludes that the financial
statements do not require revision, but the client refuses to revise or
eliminate the material inconsistency, the auditor may
A. Disclaim an opinion on the financial statements after explaining the
material inconsistency in an emphasis of matter paragraph.
B. Revise the auditor’s report to include an other matter paragraph
describing the material inconsistency.
C. Express a qualified opinion after discussing the matter with the
client’s directors.
D. Consider the matter closed because the other information is not in
the audited statements.

227. An auditor may express a qualified opinion under which of the following
circumstances?
Lack of Sufficient Restriction on the
Appropriate Evidence Scope of the Audit
A. No No
B. No Yes
C. Yes No
D. Yes Yes

228. In which of the following situations would an auditor ordinarily choose

between expressing a qualified opinion or an adverse opinion?
A. The auditor wishes to emphasize an unusually important subsequent
event.
B. The financial statements fail to disclose information that is
required by Philippine Financial Reporting Standards.
C. Events disclosed in the financial statements cause the auditor to
have substantial doubt about the entity’s ability to continue as a
going concern.
D. The auditor did not observe the entity’s physical inventory and is
unable to become satisfied as to its balance by other auditing
procedures.

229. An auditor should disclose the substantive reasons for expressing an

adverse opinion in the Basis for Adverse Opinion paragraph
A. Following the opinion paragraph.
B. Preceding the opinion paragraph.
C. Following the introductory paragraph.
D. Within the notes to the financial statements.

230. There are two broad financial reporting frameworks for comparatives: the
corresponding figures and the comparative financial statements. Which
of the following statements is correct concerning these reporting
frameworks?
A. Under the corresponding figures framework, the corresponding figures
for the prior period(s) are integral part of the current period
financial statements.
B. Under the corresponding figures framework, the corresponding figures
for the prior period(s) are considered separate financial statements.
C. Under the comparative financial statements framework, the comparative
financial statements for the prior period(s) are intended to be read
in conjunction with the amounts and other disclosures relating to the
current period.
D. Under the comparative financial statements framework, the amounts and
other disclosures for the prior period(s) form part of the current
period financial statements.
Page 39 of 59
231. In which of the following circumstances would an auditor’s report least
likely include specific reference to the corresponding figures?
A. When the auditor’s report on the prior period, as previously issued,
included a modified opinion and the matter which gave rise to the
modification is resolved and properly dealt with in the financial
statements.
B. When the auditor’s report on the prior period, as previously issued,
included a modified opinion and the matter which gave rise to the
modification is unresolved, and results in a modification of the
auditor’s report regarding the current period figures.
C. When the auditor’s report on the prior period, as previously issued,
included a modified opinion and the matter which gave rise to the
modification is unresolved, but does not result in a modification of
the auditor’s report regarding the current period figures.
D. When the auditor’s report on the prior period financial statements
containing a material misstatement included an unmodified opinion and
the prior period financial statements have not been revised and
reissued, and the corresponding figures have not been properly
restated and/or appropriate disclosures have not been made.

232. According to PSA 710, the incoming auditor may refer to the predecessor
auditor’s report on the corresponding figures in the incoming auditor’s
report for the current period. The incoming auditor’s report should
indicate
I. That the financial statements of the prior period were audited by
another auditor.
II. The type of report issued by the predecessor auditor.
III. The date of the predecessor auditor’s
report.
A. I and II only. C. I and III only.
B. II and III only. D. I, II, and III.

233. When the prior period financial statements are not audited, the incoming
auditor should state in the auditor’s report that
I. The corresponding figures are unaudited.
II. The incoming auditor is not required to perform procedures regarding
opening balances of the current period.
A. I only C. Both I and II
B. II only D. Neither I nor II

234. J, CPA, audited JST Company’s prior-year financial statements. These

statements are presented with those of the current year for comparative
purposes without J’s auditor’s report, which expressed a qualified
opinion. In drafting the current year’s auditor’s report, S, CPA, the
incoming auditor, should
I. Not name J as the predecessor auditor.
II. Indicate the type of report issued by J.
III. Indicate the substantive reasons for J’s
qualification.
IV. Indicate the date of J’s auditor’s report.
A. I, II, and IV only. C. I, II, and III only.
B. II, III, and IV only. D. I, II, III, and IV.

235. The predecessor auditor, who is satisfied after properly communicating

with the incoming auditor, has reissued his/her auditor’s report on
prior year financial statements. The predecessor auditor’s report
should

Page 40 of 59
 A. Refer to the work of the incoming auditor in the scope and opinion
paragraphs.
B. Refer to the report of the incoming auditor only in the scope
paragraph.
C. Refer to both the work and the report of the incoming auditor only in
the opinion paragraph.
D. Not refer to the report or the work of the incoming auditor.

236. The following statements relate to unaudited prior year financial

statements that are presented in comparative form with audited current
year financial statements. Which is incorrect?
A. The incoming auditor should state in the auditor’s report that the
comparative financial statements are unaudited.
B. The incoming auditor need not perform audit procedures regarding
opening balances of the current period.
C. Clear disclosure in the financial statements that the comparative
financial statements are unaudited is encouraged.
D. In situations where the incoming auditor identifies that the prior
year unaudited figures are materially misstated, the auditor should
request management to revise the prior year’s figures or if
management refuses to do so, appropriately modify the report.

OTHER REPORTING RESPONSIBILITIES

237. Financial statements of an entity that have been reviewed by an

accountant should be accompanied by a report stating that a review
A. Provides only limited assurance that the financial statements are
fairly presented.
B. Includes examining, on a test basis, information that is the
representation of management.
C. Consists principally of inquiries of company personnel and analytical
procedures applied to financial data.
D. Does not contemplate obtaining corroborating evidential matter or
applying certain other procedures ordinarily performed during an
audit.

238. An accountant’s report on a review of the financial statements of an

entity should state that the accountant
A. Does not express an opinion or any form of limited assurance on the
financial statements.
B. Conducted the review in accordance with the Philippine Standard on
Review Engagements.
C. Obtained reasonable assurance about whether the financial statements
are free of material misstatements.
D. Examined evidence, on a test basis, supporting the amounts and
disclosures in the financial statements.

239. Financial statements of an entity that have been reviewed by an

accountant should be accompanied by a report stating that
A. The scope of the inquiry and analytical procedures performed by the
accountant has not been restricted.
B. The financial statements are the responsibility of the company’s
management.
C. A review includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.
D. A review is greater in scope than a compilation, the objective of
which is to present financial statements that are free of material
misstatements.
240. An accountant who reviews the financial statements of an entity should
issue a report stating that a review
A. Provides less assurance than an audit.

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 B. Provides negative assurance that internal control is functioning as
designed.
C. Provides only limited assurance that the financial statements are
fairly presented.
D. Is substantially more in scope than a compilation.

241. When compiling the financial statements of an entity, an accountant

should
A. Review agreements with financial institutions for restrictions on
cash balances.
B. Understand the accounting principles and practices of the entity’s
industry.
C. Inquire of key personnel concerning related parties and subsequent
events.
D. Perform ratio analyses of the financial data of comparable prior
periods.

242. When compiling an entity’s financial statements, an accountant would be

least likely to
A. Perform analytical procedures designed to identify relationships that
appear to be unusual.
B. Read the compiled financial statements and consider whether they
appear to include adequate disclosure.
C. Obtain an acknowledgment from management of its responsibility for
the financial statements.
D. Plan the work so that an effective engagement will be performed.

243. Which of the following should not be included in an accountant’s report

based upon the compilation of an entity’s financial statements?
A. A statement that a compilation of the company’s financial statements
was made in accordance with the Philippine Standard on Related
Services applicable to compilation engagements.
B. A statement that management is responsible for the financial
statements.
C. A statement that the accountant has not audited or reviewed the
statements.
D. A statement that the accountant does not express an opinion but
provides only negative assurance on the statements.

244. Negative assurance may be expressed when an accountant is requested to

report agreed-upon procedures to specified
Elements of a Accounts of a
Financial Statement Financial Statement
A. Yes Yes
B. Yes No
C. No No
D. No Yes

245. An accountant may accept an engagement to apply agreed-upon procedures

that are not sufficient to express an opinion on one or more specified
accounts or items of a financial statement provided that
A. The accountant’s report does not enumerate the procedures performed.
B. The financial statements are prepared in accordance with a
comprehensive basis of accounting other than generally accepted
accounting principles.
C. Distribution of the accountant’s report is restricted.
D. The accountant is also the entity’s continuing auditor.

246. Given one or more hypothetical assumptions, a responsible party may

prepare, to the best of its knowledge and belief, an entity’s expected
financial position, results of operations, and cash flows. Such
prospective financial statements are known as
Page 42 of 59
 A. Pro forma financial statements
B. Financial projections
C. Partial presentations
D. Financial forecasts

247. A financial forecast consists of prospective financial statements that

present an entity’s expected financial position, results of operations,
and cash flows. A forecast
A. Is based on the most conservative estimates.
B. Present estimates given one or more hypothetical assumptions.
C. Unlike a projection, may contain a range.
D. Is based on assumptions reflecting conditions expected to exist and
courses of action expected to be taken.

248. When an accountant examines prospective financial statements, the

accountant’s report should include a separate paragraph that
A. Contains an opinion as to whether the prospective financial
statements are properly prepared on the basis of the assumptions and
are presented in accordance with generally accepted accounting
principles in the Philippines.
B. Provides an explanation of the differences between an examination and
an audit.
C. States that the accountant is responsible for events and
circumstances up to 1 year after the report’s date.
D. Disclaims an opinion on whether the assumptions provide a reasonable
basis for the prospective financial statements.

249. The following statements relate to the examination of prospective

financial information. Which is false?
A. The auditor should express an opinion as to whether the results shown
in the prospective financial information will be achieved.
B. Before accepting an engagement to examine prospective financial
information, the auditor should consider the intended use of the
information.
C. The auditor should not accept, or should withdraw from, an engagement
to examine prospective financial information when the assumptions are
clearly unrealistic.
D. When in the auditor’s judgment an appropriate level of satisfaction
has been obtained, the auditor is not precluded from expressing
positive assurance regarding the assumptions.

250. Which of the following is a prospective financial information for

general use upon which an accountant may appropriately report?
A. Financial projection
B. Partial presentation
C. Pro forma financial statement
D. Financial forecast

--- END ---

Page 43 of 59
 1. The main purpose of implementing quality control policies and procedures
is:
a. To comply with regulatory agency
b. To provide reasonable assurance that audit will be performed in accordance
with PSA.
c. To have favorable peer review.
d. To detect all instance of fraud during the audit.

2. Which of the following quality control objectives would best least

important to the auditors?
a. Review and supervision
b. Hiring personnel
c. Determination of audit fee
d. Professional advancement

3. A CPA firm's personnel partner periodically studies the CPA firm's

personnel advancement experience to ascertain whether
individuals meeting stated criteria are assigned increased degrees of
responsibility. This is evidence of the CPA firm's adherence
to prescribed standards of
a) Quality control. b) Due professional care. c) Supervision and
review. d) Field work.

4. CPA firms should establish quality control policies and procedures for
personnel management in order to provide reasonable
assurance that
a) Employees promoted possess the appropriate characteristics to perform
competently.
b) Personnel will have the knowledge required to fulfill responsibilities
assigned.
c) The extent of supervision and review in a given instance will be
appropriate.
d) All of the above are reasons.

5. A CPA establishes QC policies and procedures for deciding whether to

accept a new client or continue to perform services for a
current client. The primary purpose for establishing such policies is to
a) Enable the auditor to attest to the integrity or reliability of a client.
b) Comply with the quality control standards established by regulatory
bodies.
c) Minimize the likelihood of association with clients whose management lacks
integrity.
d) To lessen the exposure to litigation resulting from failure to detect
irregularities in client financial statements.

6. Within the context of quality control, the primary purpose of continuing

professional education and training activities is to
enable a CPA firm to provide personnel within the firm with
a) Technical training that assures proficiency as an auditor.
Page 44 of 59
 b) Professional education that is required in order to perform with due
professional care.
c) Knowledge required to fulfill assigned responsibilities and to progress
within the firm.
d) Knowledge required in order to perform a peer review.

7. In pursuing its quality control objectives with respect to independence, a

CPA firm may use policies and procedures such as
a) Emphasizing independence of mental attitude in firm training programs and
in supervision and review of work.
b) Prohibiting employees from owning stock of public companies.
c) Suggesting that employees conduct their banking transactions with banks
that do not maintain accounts with client firms.
d) Assigning employees who may lack independence to research positions that
do not require participation in field audit work.

8. In connection with the element of monitoring, a CPA firm's system of

quality control should ordinarily provide for the
maintenance of
a) A file of minutes of staff meetings.
b) Updated personnel files.
c) Documentation to demonstrate compliance with its policies and procedures.

d) Documentation to
demonstrate compliance with
peer review directives.
9. Which of the following
is a quality control
standard?
a) Peer review.
b) Administrative control.
c) Engagement performance.
d) Time studies.
10. Which of the following
is not one of the six

Page 45 of 59
elements of quality control
system?
A. Engagement performance.
B. Monitoring.
C. Relevant ethical
requirements.
D. Review.
11. A requirement to design
recruitment processes and
procedures to help the firm
select individuals meeting
minimum academic
requirements established by
the firm is an example of a
quality control procedure in
the area of:
A. Acceptance and
continuance of client
relationships and specific
engagements.
B. Engagement performance.
C. Human resources.
Page 46 of 59
D. Relevant ethical
requirements.
12. In pursuing a CPA
firm's quality control
objectives, a CPA firm may
maintain records indicating
which partners or employees
of
the CPA firm were previously
employed by the CPA firm's
clients. Which quality
control objective would this
be most likely to
satisfy?
A. Acceptance and
continuance of clients and
engagements.
B. Engagement performance.
C. Personnel management.
D. Relevant ethical
requirements.

Page 47 of 59
13. Which of the following
is not an element of quality
control?
A. Documentation.
B. Engagement performance.
C. Monitoring.
D. Relevant ethical
requirements
14. An engagement review
form of peer review is least
likely to include a peer
reviewer's detailed analysis
of:
A. Compilation reports.
B. Documentation of
procedures followed on a
review
C. Overall system of quality
control.
D. Review reports.

Page 48 of 59
d) Documentation to
demonstrate compliance with
peer review directives.
9. Which of the following
is a quality control
standard?
a) Peer review.
b) Administrative control.
c) Engagement performance.
d) Time studies.
10. Which of the following
is not one of the six
elements of quality control
system?
A. Engagement performance.
B. Monitoring.
C. Relevant ethical
requirements.
D. Review.
11. A requirement to design
recruitment processes and
Page 49 of 59
procedures to help the firm
select individuals meeting
minimum academic
requirements established by
the firm is an example of a
quality control procedure in
the area of:
A. Acceptance and
continuance of client
relationships and specific
engagements.
B. Engagement performance.
C. Human resources.
D. Relevant ethical
requirements.
12. In pursuing a CPA
firm's quality control
objectives, a CPA firm may
maintain records indicating
which partners or employees
of

Page 50 of 59
the CPA firm were previously
employed by the CPA firm's
clients. Which quality
control objective would this
be most likely to
satisfy?
A. Acceptance and
continuance of clients and
engagements.
B. Engagement performance.
C. Personnel management.
D. Relevant ethical
requirements.
13. Which of the following
is not an element of quality
control?
A. Documentation.
B. Engagement performance.
C. Monitoring.
D. Relevant ethical
requirements

Page 51 of 59
14. An engagement review
form of peer review is least
likely to include a peer
reviewer's detailed analysis
of:
A. Compilation reports.
B. Documentation of
procedures followed on a
review
C. Overall system of quality
control.
D. Review reports.
d) Documentation to demonstrate compliance with peer review directives.

9. Which of the following is a quality control standard?

a) Peer review.
b) Administrative control.
c) Engagement performance.
d) Time studies.

10. Which of the following is not one of the six elements of quality control
system?
A. Engagement performance.
B. Monitoring.
C. Relevant ethical requirements.
D. Review.

11. A requirement to design recruitment processes and procedures to help the firm
select individuals meeting minimum academic
requirements established by the firm is an example of a quality control procedure
in the area of:
A. Acceptance and continuance of client relationships and specific engagements.
B. Engagement performance.
C. Human resources.
D. Relevant ethical requirements.

12. In pursuing a CPA firm's quality control objectives, a CPA firm may maintain
records indicating which partners or employees of
the CPA firm were previously employed by the CPA firm's clients. Which quality
control objective would this be most likely to
satisfy?
A. Acceptance and continuance of clients and engagements.

Page 52 of 59
B. Engagement performance.
C. Personnel management.
D. Relevant ethical requirements.

13. Which of the following is not an element of quality control?

A. Documentation.
B. Engagement performance.
C. Monitoring.
D. Relevant ethical requirements

14. An engagement review form of peer review is least likely to include a peer
reviewer's detailed analysis of:
A. Compilation reports.
B. Documentation of procedures followed on a review
C. Overall system of quality control.
D. Review reports.

DO-IT-YOURSELF QUESTIONS:
1. A firm of independent auditors must establish and follow quality control
policies and procedures because these standards
a. Are necessary to meet increasing requirements of auditor’s liability as
insurers
b. Are required by the SEC for auditors of all firms.
c. Include formal filling of records of such policies and procedures to a
regulatory agency.
d. Give reasonable assurance that the firm as a whole will comply with
professional standards.

2. Which of the following is an element of CPA firm’s quality control system that
should be considered in establishing its quality
control policies and procedures?
a. Complying with laws and regulations
b. Using statistical sampling techniques
c. Assigning personnel to engagement
d. Considering audit risk and materiality

3. A quality control policy that requires personnel in the firm to adhere to

independence, integrity, objectivity, confidentiality and
professional behavior, relates to
a. Professional requirements
b. Skills and Competence
c. Assignment
d. Monitoring

4. Quality control for a CPA firm as referred to in Statements on Quality Control

Standards, applies to
a) Auditing services only.
b) Auditing and management advisory services.
c) Auditing and tax services.
d) Auditing and accounting and review services.

5. The least important evidence of a CPA firm's evaluation of its system of QC

would concern the CPA firm's policies and
procedures for
a) Employment (hiring).
b) Confidentiality of audit engagements.
c) Assigning personnel to audit engagements.
d) Determination of audit fees.

6. In pursuing its quality control objectives with respect to acceptance of a

client, a CPA firm is not likely to
a) Make inquiries of the proposed client's legal counsel.
b) Review financial statements of the proposed client.
c) Make inquiries of previous auditors.
d) Review the personnel practices of the proposed client.
Page 53 of 59
7. In pursuing a CPA firms' quality control objectives, a CPA firm may maintain
records indicating which partners or employees of
the CPA firm were previously employed by the CPA firm's clients. Which quality
control objective would this be most likely to
satisfy?
a) Acceptance of client. b) Supervision. c) Independence. d)
Monitoring.

8. Which of the following is an element of quality control?

a) Supervision
b) Inspection
c) Personnel management
d) Consultation

9. One element of the personnel management quality control standard is

professional development. The primary reason why a
CPA firm establishes policies and procedures for professional development of
staff accountants is to
a) Comply with the continuing educational requirements imposed by various states
for all staff accountants in CPA firms.
b) Establish, in fact as well as in appearance, that staff accountants are
increasing their knowledge of accounting and auditing

matters.
c) Provide a forum for staff
accountants to exchange
their experiences and views
concerning firm policies and
procedures.
d) Provide reasonable
assurance that staff
personnel will have the
knowledge required to enable
them to fulfill
responsibilities.
10. A procedure in which a
quality control partner
Page 54 of 59
periodically tests the
application of quality
control procedures is most
directly
related to which quality
control element?
A. Engagement performance.
B. Human resources.
C. Leadership
responsibilities for quality
with the firm.
D. Monitoring
11. A requirement that
working papers be reviewed
by the supervisor, and any
deficiencies be discussed
with the preparer is an
example of a quality control
procedure in the area of:
A. Acceptance and
continuance of client

Page 55 of 59
relationships and specific
engagements.
B. Engagement performance.
C. Human resources.
D. Relevant ethical
requirements.
12. The body that issues
international pronouncements
providing auditing
procedural and reporting
guidance is the:
A. International Federation
of Auditors.
B. Multinational Reporting
Commission.
C. International Auditing
and Assurance Standards
Board.
D. Auditing Standards Board.
13. A CPA firm establishes
quality control policies and
procedures for deciding
Page 56 of 59
whether to accept a new
client or continue to
perform services for a
current client. The primary
purpose for establishing
such policies and procedures
is:
A. To enable the auditor to
attest to the integrity or
reliability of a client.
B. To comply with the
quality control standards
established by regulatory
bodies.
C. To minimize the
likelihood of association
with clients whose
managements lack integrity.
D. To lessen the exposure to
litigation resulting from
failure to detect fraud in
client financial statements.
Page 57 of 59
14. A peer review in which
the peer reviewers study and
appraise a CPA firm's system
of quality control to
perform accounting and
auditing work is referred to
as a(n):
A. Engagement review.
B. Inspection review.
C. Supervision review.
D. System review
matters.
c) Provide a forum for staff accountants to exchange their experiences and views
concerning firm policies and procedures.
d) Provide reasonable assurance that staff personnel will have the knowledge
required to enable them to fulfill responsibilities.

10. A procedure in which a quality control partner periodically tests the

application of quality control procedures is most directly
related to which quality control element?
A. Engagement performance.
B. Human resources.
C. Leadership responsibilities for quality with the firm.
D. Monitoring

11. A requirement that working papers be reviewed by the supervisor, and any
deficiencies be discussed with the preparer is an
example of a quality control procedure in the area of:
A. Acceptance and continuance of client relationships and specific engagements.
B. Engagement performance.
C. Human resources.
D. Relevant ethical requirements.

12. The body that issues international pronouncements providing auditing

procedural and reporting guidance is the:
A. International Federation of Auditors.
B. Multinational Reporting Commission.
C. International Auditing and Assurance Standards Board.
D. Auditing Standards Board.
13. A CPA firm establishes quality control policies and procedures for deciding
whether to accept a new client or continue to
perform services for a current client. The primary purpose for establishing such
policies and procedures is:
A. To enable the auditor to attest to the integrity or reliability of a client.

Page 58 of 59
B. To comply with the quality control standards established by regulatory bodies.
C. To minimize the likelihood of association with clients whose managements lack
integrity.
D. To lessen the exposure to litigation resulting from failure to detect fraud in
client financial statements.

14. A peer review in which the peer reviewers study and appraise a CPA firm's
system of quality control to perform accounting and
auditing work is referred to as a(n):
A. Engagement review.
B. Inspection review.
C. Supervision review.
D. System review

Page 59 of 59