Northern CPAR Final Pre-board Auditing Theory

SET B
FINAL PRE-BOARD EXAMINATION

INSTRUCTIONS: Select the BEST answer for each of the following

questions. Mark only one answer for each item by shading the box
corresponding to the letter of your choice on the sheet provided.
STRICTLY NO ERASURES ALLOWED. Use pencil no. 2 only.

1. They are not presented as complete financial statements capable of

standing alone, but are an integral part of the current period financial
statements intended to be read only in relationship to the current
period figures.
a. Corresponding figures c. Prior period figures
b. Comparatives d. Comparative financial statements

2. The following procedures relate to Skills and Competence, except

a. Identify criteria which will be considered in evaluating individual
performance and expected proficiency.
b. Provide procedures for maintaining the firm's standards of quality
for the work performed.
c. Establish qualifications and guidelines for evaluating potential
hirees at each professional level.
d. Provide, to the extent necessary, programs to fill the firm's needs
for personnel with expertise in specialized and industries.

3. Specific responses to the auditor's assessment of the risk of material

misstatement resulting from fraud will vary depending upon the types or
combinations of fraud risk factors or conditions identified, and the
account balances, classes of transactions and assertions they may
affect. Specific examples of such responses least likely include:
a. Visit locations or perform certain tests on a surprise or unannounced
basis.
b. Request that inventories be counted at interim date.
c. Alter the audit approach in the current year.
d. Seeking additional audit evidence from sources outside of the entity
being audited.

4. Which statement is incorrect regarding the auditor's consideration of

laws and regulations in an audit of financial statements?
a. When the auditor becomes aware of information concerning a possible
instance of noncompliance, the auditor should evaluate the possible
effect on the financial statements.
b. If the auditor concludes that the noncompliance has a material effect
on the financial statements, and has not been properly reflected in
the financial statements, the auditor should express a qualified or
an adverse opinion.
c. The auditor may withdraw from the engagement when the entity does not
take the remedial action that the auditor considers necessary in the
circumstances, even when the noncompliance is not material to the
financial statements.
d. In order to plan the audit, the auditor should obtain a specific
understanding of the legal and regulatory framework applicable to the
entity and the industry and how the entity is complying with that
framework.

5. In conducting a fraud investigation the auditor should first:

a. Obtain the facts c. Identify the perpetrators
b. Obtain a confession d. Notify a law enforcement agency

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6. Generally, the decision to notify parties outside the client's
organization regarding an illegal act is the responsibility of the
a. Independent auditor. c. Outside legal counsel.
b. Management. d. Internal auditors.

7. Oli Manufacturing, Inc. sought a P2,000,000 loan from Local Lending

Corporation. Local Lending insisted that audited financial statements be
submitted before granting credit. Oli agreed. An audit was performed by
an independent auditor who submitted an audit report to Oli that was to
be used solely for the purpose of negotiating a loan from Local. Local,
upon reading the audited financial statements, decided in good faith not
to extend the credit desired. Certain ratios, used routinely by Local in
reaching credit decisions, were judged insufficient. Oli used copies of
the audited financial statements to obtain credit elsewhere. Despite
complying with Philippine Standards on Auditing, the independent auditor
failed to discover a sophisticated embezzlement scheme perpetrated by
Oli's chief financial officer. The auditor is liable to
a. Third parties who relied on the audited financial statements to
extend credit.
b. Oli to repay the audit fee because Local did not extend credit.
c. Oli for any losses Oli suffered as a result of failing to discover
the embezzlement.
d. None of the parties.

8. If a CPA was asked in March 2012 to audit a company's financial

statements for the year ended December 31, 2011, the CPA:
a. Should not accept the engagement since he was not able to observe the
inventory taking as of December 31, 2011.
b. May accept the engagement provided he will be able to perform an
adequate examination and to express a possible qualified opinion, if
necessary.
c. Should not accept the engagement because generally accepted auditing
standards require that a CPA be engaged before the client's year end.
d. May accept the engagement provided the company assures him that he
will be able to give an unqualified opinion.

9. Which of the following is incorrect about the standard audit report?

a. The opinion paragraph of an auditor's report on financial statements
refers to generally accepted accounting principles.
b. The consistent application of accounting principles is implicitly
represented in the standard auditor's report on comparative financial
statements.
c. Examination of evidence on a test basis is explicitly represented in
the standard auditor's report.
d. The auditor's responsibility for the financial statements is
explicitly represented in the opening paragraph of the auditor's
standard audit report.

10. When financial statements are audited by an accounting firm, the

partner-in-charge of engagement ordinarily signs in the name of the firm
because:
a. The partner-in-charge of engagement should be relieved of any
responsibility regarding the opinion issued.
b. It is required by reporting standards.
c. The firm assumes responsibility for the audit.
d. The opinion becomes more credible if signed in name of the firm.

11. An auditor completed fieldwork on February 10, 2012 for a December 31,
2011 yearend client. A significant subsequent event occurred on February
22, 2012. In this case, which of the following report dates would not be
appropriate?
a. February 10, 2012.
b. February 10, except Note 1, February 22, 2012.
c. February 22, 2012.
d. December 31, 2011.

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12. ABCFarms, Inc. a Manila-based company has a subsidiary at La Trinidad
City. A CPA has completed his examination of the consolidated financial
statements prepared by the client ABC Farms. Because of his prior
commitments, the CPA did not examine the financial statements of the La
Trinidad subsidiary, but he did receive the unqualified opinion of
another CPA on the subsidiary's statements. The procedures used by ABC
Farms to prepare the consolidated statements have been reviewed and
approved.

The principal CPA wishes to accept full responsibility for his opinion
on consolidated statements. He has made sufficient review of the work of
the other accountant to justify his accepting full responsibility for
the work of the other CPA.
a. The principal CPA may express an unqualified opinion on the
consolidated statements where there has been utilization of the
report of another CPA, provided that the report of the other CPA is
attached.
b. The principal CPA need make no reference to the other CPA in either
the scope or opinion paragraph of the report on the consolidated
statements.
c. The principal CPA can issue an unqualified opinion as to the
unconsolidated parent whose examination he conducted, but must
qualify his opinion on the consolidated statements, as stated in the
GAAS concerning the scope of the examination.
d. Under these circumstances, the principal CPA must refer to the other
CPA in the scope or middle paragraph and state that he assumes full
responsibility for the work of the other CPA. His opinion may then be
unqualified.

13. Wowie, CPA, was about to issue an unqualified opinion on the financial
statements of Stampede Company when a letter was received from
Stampede's independent counsel. The letter stated that the NTC has
notified Stampede that its broadcasting license will not be renewed
because of alleged irregularities in its broadcasting practices.
Stampede cannot continue to operate without the license. Wowie has also
learned that Stampede and its independent counsel plan to take all
necessary legal action to retain the license. The letter from
independent counsel, however, states that a favorable outcome of any
legal action is highly uncertain. On the basis of this information, what
action should Wowie take?
a. Issue an unqualified opinion, with an explanatory paragraph that
describes the matter giving rise to the uncertainty.
b. Issue an adverse opinion and disclose all reasons why.
c. Issue a piecemeal opinion with full disclosure made of the license
dispute in a note to the financial statements.
d. Issue an unqualified opinion if full disclosure is made of the matter
in a note to the financial statements.

14. Identify the appropriate type of opinion to issue when the auditor is
satisfied that there is a remote likelihood of a loss resulting from the
resolution of an uncertainty.
a. Unqualified opinion.
b. Unqualified opinion with a separate explanatory paragraph.
c. Qualified opinion or disclaimer of opinion, depending on whether the
uncertainty is adequately disclosed.
d. Qualified opinion or disclaimer of opinion, depending upon the
materiality of the loss.

15. Circumstances which make it impracticable to apply the necessary audit

procedures:
a. Does not have to be addressed in the standard audit report provided
this is agreed upon
b. Requires changes in the audit report
c. Will not permit the auditor to issue any audit report
d. Requires that the financial statements items not examined be included
in management's representation letter.
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16. Under which of the following circumstances may a CPA agree with a
departure from a Philippine Financial Reporting Standard?
a. When the Standard was one formulated by the Financial Reporting
Standards Council (FRSC) inasmuch as the FRSC is no longer the
standard-setting body.
b. When the CPA can demonstrate that application of the principle in
question would make the financial statements materially misleading.
c. When the disputed principle is contrary to industry practice.
d. When adoption of the principle would cause the financial statements
to be inconsistent with prior years.

17. When a new audit report is issued on financial statements because of

subsequent discovery of material misstatements on previously issued
financial statements, the audit report should include
a. No modification.
b. Qualified opinion because of scope limitation.
c. Qualified opinion because of inadequate disclosure.
d. Emphasis of a matter paragraph referring to a note to the financial
statements that more extensively discusses the reason for the
revision of the previously issued financial statements.

18. Which of the following is least considered a scope limitation in an

audit engagement?
a. The auditor is unable to carry out an audit procedure believed to be
desirable.
b. The timing of auditor's appointment is too late which results to
inability of the auditor to perform prescribed procedures.
c. The audit engagement requires an audit of balance sheet only.
d. The entity's accounting records are inadequate.

19. The auditor's report would have to note an inconsistency of a client's

accounting principles in which of the following situations?
a. During the client's first year of operations, it began using weighted
average, but changed to FIFO after six months, and finished their
first year with their financial statements using FIFO.
b. Client's previous year's financial statements valued inventory using
weighted average, while the current statements used FIFO.
c. During the previous year the client, a privately-held company which
did not publish its financial statements and was not audited, valued
inventory using weighted average. This year it changed to FIFO. The
amount of the inventory was immaterial in both years using either
method.
d. All of the foregoing situations would require the auditor's report to
note the inconsistency.

20. A CPA engaged to examine financial statements observes that the

accounting for a certain material item is not in conformity with
generally accepted accounting principles, and that this fact is
prominently disclosed in a footnote to the financial statements. The CPA
does not agree with this departure from GAAP and should
a. Not allow the accounting treatment for this item to affect the type
of opinion because the deviation from generally accepted accounting
principles was disclosed.
b. Express an unqualified opinion and add an explanatory paragraph
emphasizing the matter by reference to the footnote.
c. Qualify the opinion because of the deviation from generally accepted
accounting principles.
d. Disclaim an opinion.

21. Apublic accounting firm would least like be considered in violation of

the independence rules in which of the following instances?
a. A partner’s checking account, which is fully insured by the
Philippine Deposit Insurance Corporation, is held at a financial
institution for which the public accounting performs attest services.
b. A manager of the firm donates service as vice-president of a
charitable organization that is an audit client of the firm.
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c. An attest client owes the firm fees for this and last year’s annual
engagements.
d. A covered member’s dependent son owns stock in an attest client.

22. To maximize independence, the director of internal auditing should

report to the
a. Audit committee. c. Chief financial officer.
b. Controller. d. Director of information systems.

23. Bruno, CPA, was requested to perform a review engagement for Beauty,
Inc., a non-public entity. Beauty has an immaterial direct financial
interest. In this situation, Beauty is:
a. Not independent, and therefore may not be associated with the
financial statements.
b. Not independent, and therefore, may not issue a review report.
c. Not independent, and therefore, may issue a review report, but may
not issue an auditor’s report.
d. Independent because the financial interest is immaterial, and
therefore, may issue a review report.

24. This exists when other information (such as presented in an annual

report) contradicts information contained in the financial statements.
a. Material misstatement of fact c. Material misstatements
b. Material scope limitation d. Material inconsistency

25. Which of the following is allowed under the revised rules on

advertising?
a. Publishing services in billboard (e.g., tarpaulin, streamers, etc.)
advertisements
b. Using words or phrases which are hard to define and even more
difficult to substantiate objectively.
c. Giving too much emphasis on competitive differences.
d. None of these are allowed forms of advertising.

26. Theaccounting firm of Chad and Dawson, CPAs, is negotiating a fee with
ABC Company, a new audit client. ABC is in a high-risk industry. They
agree as follows: client will pay P150,000 if Chad issues a clean,
unqualified opinion, P100,000 if a qualified opinion is issued, P75,000
if an adverse opinion is issued and P50,000 if a disclaimer of opinion
is issued. If there is a violation of the Code of Ethics?
a. No. The fees have been set in accordance with the Code of
Professional Ethics.
b. Yes. It is a contingent fee arrangement.
c. Yes. The fees are not contingent, but they are inadequate in light of
the risk involved. There might be a risk of a perception that the
quality of work could be impaired.
d. No. The fees have been set in the proper manner, since an unqualified
opinion demands more audit work to detect and adjust misstatements,
while a disclaimer is not really an opinion, but a refusal to express
an opinion.

27. Andres, CPA is in charge of the audit of Mabuhay Resort, Inc. Seven
young and wild members of the audit firm’s professional staff are
working with Andres on this engagement, all of which are avid drivers.
Mabuhay Resort owns two condominiums in Boracay, which it uses primarily
to entertain clients. The controller of Mabuhay Resort has told Andres
that her whole team is welcome to use the condominiums at no charge any
time that they are not already in use. How should Andres, CPA, respond
to this offer?
a. Andres should withdraw from the engagement due to a significant
threat to independence.
b. Andres alone may accept the offer, but his staff may not use the
condominiums.
c. Andres should decline the offer, both for himself and his staff.

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d. Andres may accept the offer, but only in favor of his staff; he
cannot use the condominiums because as a partner, Andres will sign
the report.

28. Theprice that would be received to sell an asset or paid to transfer a

liability in an orderly transaction between market participants at the
measurement date:
a. Fair value c. Net realizable value
b. Transaction price d. Exit price

29. The underlying conditions that create demand for users for reliable
financial information do not include (the):
a. Transactions that are numerous and complex.
b. Expression of an opinion on the fairness of the financial statements.
c. Users separated from accounting records by distance and time.
d. Financial decisions that are important to investors and users.

30. An accountant who accepts an engagement to compile a financial

projection most likely would make the client aware that the:
a. Projection may not be included in a document with audited historical
financial statements.
b. Accountant's responsibility to update the projection for future
events and circumstances is limited to one year.
c. Projection omits all hypothetical assumptions and presents the most
likely future financial position.
d. Engagement does not include an evaluation of the support for the
assumptions underlying the projection.

31. Which of the following audit procedures most likely would 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 accounts receivable from principal customers.
b. Reconciliation of interest expense with debt outstanding.
c. Confirmation of bank balances.
d. Review of compliance with terms of debt agreements.

32. Whichof the following would not be considered an analytical procedure?

a. Converting dollar amounts of income statement account balances to
percentages of net sales for comparison with industry averages.
b. Developing the current year's expected net sales based on the sales
trend of similar entities within the same industry.
c. Projecting a deviation rate by comparing the results of a statistical
sample with the actual population characteristics.
d. Estimating the current year's expected expenses based on the prior
year's expenses and the current year's budget.

33. Aprincipal auditor decides not to refer to the audit of another CPA who
audited a subsidiary of the principal auditor's client. After making
inquiries about the other CPA's professional reputation and
independence, the principal auditor most likely would:
a. Document in the engagement letter that the principal auditor assumes
no responsibility for the other CPA's work.
b. Obtain written permission from the other CPA to omit the reference in
the principal auditor's report.
c. Contact the other CPA and review the audit programs and working
papers pertaining to the subsidiary.
d. Add an explanatory paragraph to the auditor's report indicating that
the subsidiary's financial statements are not material to the
consolidated financial statements.

34. Obtaining an understanding of an internal control involves evaluating

the design of the control and determining whether the control has been:
a. Authorized. c. Implemented.
b. Tested. d. Monitored.

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35. In auditing related party transactions, an auditor ordinarily places
primary emphasis on:
a. The probability that related party transactions will recur.
b. Confirming the existence of the related parties.
c. Verifying the valuation of the related party transactions.
d. The adequacy of the disclosure of the related party transactions.

36. Theinability to complete which of the following activities most likely

would prevent an accountant from accepting and completing an engagement
for a review of financial statements performed in accordance with PSREs?
a. Performing tests of details of major account balances.
b. Performing inquiries and analytical procedures.
c. Obtaining an understanding of internal control to assess control
risk.
d. Having previous experience in the client's industry.

37. Which of the following procedures most likely would be performed in a

review engagement of a client’s financial statements in accordance with
PSRE’s?
a. Making inquiries of management.
b. Observing a year-end inventory count.
c. Assessing the internal control system.
d. Examining subsequent cash receipts.

38. An auditor should consider which of the following when evaluating the
ability of a company to continue as a going concern?
a. Audit fees.
b. Future assurance services.
c. Management's plans for disposal of assets.
d. A lawsuit for which judgment is not anticipated for 18 months.

39. Inwhich of the following should an auditor's report refer to the lack
of consistency when there is a change in accounting principle that is
significant?
a. The scope paragraph.
b. The opinion paragraph.
c. An explanatory paragraph following the opinion paragraph.
d. An explanatory paragraph before the opinion paragraph.

40. Which of the following is the best way to compensate for the lack of
adequate segregation of duties in a small organization?
a. Disclosing lack of segregation of duties to the external auditors
during the annual review.
b. Replacing personnel every three or four years.
c. Requiring accountants to pass a yearly background check.
d. Allowing for greater management oversight of incompatible activities.

41. Under which of the following circumstances should an auditor consider

confirming the terms of a large complex sale?
a. When the assessed level of control risk over the sale is low.
b. When the assessed level of detection risk over the sale is high.
c. When the combined assessed level of inherent and control risk over
the sale is moderate.
d. When the combined assessed level of inherent and control risk over
the sale is high.

42. Which of the following procedures would an auditor most likely perform
in the planning stage of an audit?
a. Make a preliminary judgment about materiality.
b. Confirm a sample of the entity's accounts payable with known
creditors.
c. Obtain written representations from management that there are no
unrecorded transactions.
d. Communicate management's initial selection of accounting policies to
the audit committee.

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43. An auditor is required to confirm accounts receivable if the accounts
receivable balances are:
a. Older than the prior year.
b. Material to the financial statements.
c. Smaller than expected.
d. Subject to valuation estimates.

44. Which of the following situations most likely represents the highest
risk of a misstatement arising from misappropriations of assets?
a. A large number of bearer bonds on hand.
b. A large number of inventory items with low sales prices.
c. A large number of transactions processed in a short period of time.
d. A large number of fixed assets with easily identifiable serial
numbers.

45. Ofwhich of the following matters is a management representation letter

required to contain specific representations?
a. Length of a material contract with a new customer.
b. Information concerning fraud by the CFO.
c. Reason for a significant increase in revenue over the prior year.
d. The competency and objectivity of the internal audit department.

46. In which of the following paragraphs of an auditor's report does an

auditor communicate the nature of the engagement and the specific
financial statements covered by the audit?
a. Scope paragraph. c. Opinion paragraph.
b. Introductory paragraph. d. Explanatory paragraph.

47. Theunderstanding with the client regarding a financial statement audit

generally includes which of the following matters?
a. The expected opinion to be issued.
b. The responsibilities of the auditor.
c. The contingency fee structure.
d. The preliminary judgment about materiality.

48. Underthe Sarbanes-Oxley Act of 2002, exactly how many consecutive years
may an audit partner lead an audit?
a. Four years. c. Five years.
b. Six years. d. Seven years.

49. A government internal audit function is presumed to be free from

organizational independence impairments for reporting internally when
the head of the organization:
a. Is not accountable to those charged with governance.
b. Performs auditing procedures that are consistent with generally
accepted accounting principles.
c. Is a line-manager of the unit under audit.
d. Is removed from political pressures to conduct audits objectively,
without fear of political reprisal.

50. Eachof the following is a type of known misstatement, except:

a. An inaccuracy in processing data.
b. The misapplication of accounting principles.
c. Differences between management and the auditor's judgment regarding
estimates.
d. A difference between the classification of a reported financial
statement element and the classification according to generally
accepted accounting principles.

51. An accountant was asked by a potential client to perform a compilation

of its financial statements. The accountant is not familiar with the
industry in which the client operates. In this situation, which of the
following actions is the accountant most likely to take?
a. Request that management engage an independent industry expert to
consult with the accountant.
b. Accept the engagement and obtain an adequate level of knowledge about
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the industry.
c. Decline the engagement.
d. Postpone accepting the engagement until the accountant has obtained
an adequate level of knowledge about the industry.

52. An accountant can perform, with preapproval of the audit committee of

the board of directors, which of the following non-audit services?
a. Bookkeeping services. c. Human resource services.
b. Tax planning services. d. Internal audit outsourcing services.

53. To compile financial statements of a client, an accountant should:

a. Identify material misstatements in the financial statements.
b. Review bank statement reconciliations.
c. Make inquiries of significant customers, vendors, and creditors.
d. Obtain a general understanding of the client's business transactions.

54. ACPA firm would best provide itself reasonable assurance of meeting its
responsibility to offer professional services that conform with
professional standards by:
a. Establishing an understanding with each client concerning individual
responsibilities in a signed engagement letter.
b. Assessing the risk that errors and fraud may cause the financial
statements to contain material misstatements.
c. Developing specific audit objectives to support management's
assertions that are embodied in the financial statements.
d. Maintaining a comprehensive system of quality control that is
suitably designed in relation to its organizational structure.

55. An auditor who is unable to form an opinion on a new client's opening

inventory balances may issue an unqualified opinion on the current
year's:
a. Income statement only.
b. Statement of cash flows only.
c. Balance sheet only.
d. Statement of shareholders' equity only.

56. Whichof the following procedures would a CPA most likely perform in the
planning phase of a financial statement audit?
a. Make inquiries of the client's lawyer concerning pending litigation.
b. Perform cutoff tests of cash receipts and disbursements.
c. Compare financial information with nonfinancial operating data.
d. Recalculate the prior year's accruals and deferrals.

57. ZagCo. issues financial statements that present financial position and
results of operations but Zag omits the related statement of cash flows.
Zag would like to engage Brown, CPA, to audit its financial statements
without the statement of cash flows although Brown's access to all of
the information underlying the basic financial statements will not be
limited. Under these circumstances, Brown most likely would:
a. Add an explanatory paragraph to the standard auditor's report that
justifies the reason for the omission.
b. Refuse to accept the engagement as proposed because of the client-
imposed scope limitation.
c. Explain to Zag that the omission requires a qualification of the
auditor's opinion.
d. Prepare the statement of cash flows as an accommodation to Zag and
express an unqualified opinion.

58. Underthe ethical standards of the profession, which of the following is

a "permitted loan" regardless of the date it was obtained?
a. Home mortgage loan. c. Student loan.
b. Secured automobile loan. d. Personal loan.

59. Inconfirming a client's accounts receivable in prior years, an auditor

discovered many differences between recorded account balances and
confirmation replies. These differences were resolved and were not
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misstatements. In defining the sampling unit for the current year's
audit, the auditor most likely would choose:
a. Customers with credit balances.
b. Small account balances.
c. Individual overdue balances.
d. Individual invoices.

60. An auditor is engaged to report on selected financial data that are

included in a client-prepared document containing audited financial
statements. Under these circumstances, the report on the selected data
should:
a. State that the presentation is a comprehensive basis of accounting
other than GAAP.
b. Restrict the use of the report to those specified users within the
entity.
c. Be limited to data derived from the entity's audited financial
statements.
d. Indicate that the data are subject to prospective results that may
not be achieved.

61. Forwhich of the following audit tests would an auditor most likely use
attribute sampling?
a. Inspecting purchase orders for proper approval by supervisors.
b. Making an independent estimate of recorded payroll expense.
c. Determining that all payables are recorded at year end.
d. Selecting accounts receivable for confirmation of account balances.

62. Which of the following controls should prevent an invoice for the
purchase of merchandise from being paid twice?
a. The check signer accounts for the numerical sequence of receiving
reports used in support of each payment.
b. An individual independent of cash operations prepares a bank
reconciliation.
c. The check signer reviews and cancels the voucher packets.
d. Two check signers are required for all checks over a specified
amount.

63. Aclient has capitalizable leases but refuses to capitalize them in the
financial statements. Which of the following reporting options does an
auditor have if the amounts pervasively distort the financial
statements?
a. Qualified opinion. c. Unqualified opinion.
b. Disclaimer opinion. d. Adverse opinion.

64. Whichof the following items should be included in prospective financial

statements issued in an attestation engagement performed in accordance
with Statements on Standards for Attestation Engagements?
a. All significant assertions used to prepare the financial statements.
b. All significant assumptions used to prepare the financial statements.
c. Pro forma financial statements for the past two years.
d. Historical financial statements for the past three years.

65. Acompany employs three accounts payable clerks and one treasurer. Their
responsibilities are as follows:
Employee Responsibility
Clerk 1 Reviews vendor invoices for proper signature
approval.
Clerk 2 Enters vendor invoices into the accounting system
and verifies payment terms.
Clerk 3 Posts entered vendor invoices to the accounts
payable ledger for payment and mails checks.
Treasurer Reviews the vendor invoices and signs each check.
Which of the following would indicate a weakness in the company's
internal control?
a. Clerk 1 opens all of the incoming mail.
b. Clerk 2 reconciles the accounts payable ledger with the general
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ledger monthly.
c. Clerk 3 mails the checks and remittances after they have been signed.
d. The treasurer uses a stamp for signing checks.

66. Which of the following management assertions is an auditor most likely

testing if the audit objective states that all inventory on hand is
reflected in the ending inventory balance?
a. The entity has rights to the inventory.
b. Inventory is properly valued.
c. Inventory is properly presented in the financial statements.
d. Inventory is complete.

67. Which of the following activities is an accountant not responsible for

in review engagements performed in accordance with Statements on
Standards for Accounting and Review Services?
a. Performing basic analytical procedures.
b. Remaining independent.
c. Developing an understanding of internal control.
d. Providing any form of assurance.

68. Which of the following items should be included in an auditor's report

for financial statements prepared in conformity with an other
comprehensive basis of accounting (OCBOA)?
a. A sentence stating that the auditor is responsible for the financial
statements.
b. A title that includes the word "independent."
c. The signature of the company controller.
d. A paragraph stating that the audit was conducted in accordance with
OCBOA.

69. Which of the following statements best describes why an auditor would
use only substantive procedures to evaluate specific relevant assertions
and risks?
a. The relevant internal control components are not well documented.
b. The internal auditor already has tested the relevant controls and
found them effective.
c. Testing the operating effectiveness of the relevant controls would
not be efficient.
d. The cost of substantive procedures will exceed the cost of testing
the relevant controls.

70. Whichof the following courses of action is the most appropriate if an

auditor concludes that there is a high risk of material misstatement?
a. Use smaller, rather than larger, sample sizes.
b. Perform substantive tests as of an interim date.
c. Select more effective substantive tests.
d. Increase of tests of controls.

71. Which of the following procedures would be generally performed when

evaluating the accounts receivable balance in an engagement to review
financial statements in accordance with Philippine Standard on Review
Engagements?
a. Perform a reasonableness test of the balance by computing days' sales
in receivables.
b. Vouch a sample of subsequent cash receipts from customers.
c. Confirm individually significant receivable balances with customers.
d. Review subsequent bank statements for evidence of cash deposits.

72. In which of the following circumstances would a covered member's

independence be impaired with respect to an audit client?
a. The member is designated to serve as guardian of a friend's children
if the need arises, and the friend's estate, which would be held in
trust for the children, holds significant stock ownership in a client
entity.
b. The member's spouse qualifies because of geographical residence to
belong to a client's credit union, and all transactions with the
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credit union are conducted under normal operating practices.
c. The member owns municipal utility bonds issued by a client, and the
bonds are not material to the member's wealth.
d. The member belongs to a client golf club that requires members to
acquire a share of the club's debt securities.

73. According to the PSQC 1 and PSA 220, a public accounting firm should
establish quality control policies to provide assurance about which of
the following matters related to agreed-upon procedures engagements?
a. Use of the report is not restricted.
b. The public accounting firm takes responsibility for the sufficiency
of procedures.
c. The practitioner is independent from the client and other specified
parties.
d. The practitioner sets the criteria to be used in the determination of
findings.

74. ACPA is engaged to audit the financial statements of a client. After

the audit begins, the client's management questions the extent of
procedures and objects to the confirmation of certain contracts. The
client asks the accountant to change the scope of the engagement from an
audit to a review. Under these circumstances, the accountant should do
each of the following, except:
a. Issue an accountant's review report with a separate paragraph
discussing the change in engagement scope.
b. Consider the additional audit effort and cost required to complete
the audit.
c. Evaluate the possibility that financial statement information
affected by the limitation on work to be performed may be incorrect
or incomplete.
d. Consider the reason given for the client's request and assess whether
the request is reasonable.

75. Hart,CPA, is engaged to review the year 2 financial statements of Kell

Co. Previously, Hart audited Kell's year 1 financial statements and
expressed a qualified opinion due to a scope limitation. Hart decides to
include a separate paragraph in the year 2 review report because
comparative financial statements are being presented for year 2 and year
1. This separate paragraph should indicate the:
a. Substantive reasons for the prior-year's qualified opinion.
b. Reason for changing the level of service from an audit to a review.
c. Consistency of application of accounting principles between year 2
and year 1.
d. Restriction on the distribution of the report for internal use only.

76. Whichof the following statements is generally correct about the sample
size in statistical sampling when testing internal controls?
a. As the population size doubles, the sample size should increase by
about 67%.
b. The sample size is inversely proportional to the expected error rate.
c. There is no relationship between the tolerable error rate and the
sample size.
d. The population size has little or no effect on the sample size.

77. Thebody that develops the International Code of Ethics for Professional
Accountants
a. International Federation of Accountants (IFAC)
b. International Accounting Education Standards Board (IAESB)
c. International Auditing and Assurance Standards Board(IAASB)
d. International Ethics Standards Board for Accountants (IESBA)

78. The Bureau of Internal Revenue (BIR) is the agency whose primary
objective is to raise revenues for the government. It also prescribes
additional requirements for audited financial statements that accompany
tax returns of various entities. Who is the incumbent head (or any
appropriate title as necessary) of the BIR?
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a. Secretary Cesar Purisima c. Chairman Benjamin Punongbayan
b. Secretary Leila De-Lima d. Commissioner Kim Jacinto-Henares

79. An auditor observes the mailing of monthly statements to a client's

customers and reviews evidence of follow-up on errors reported by the
customers. This test of controls most likely is performed to support
management's financial statement assertions of:
Presentation and Existence or
disclosure occurrence
a. Yes Yes
b. Yes No
c. No Yes
d. No No

80. When a company's stock record books are maintained by an outside

registrar or transfer agent, the auditor should obtain confirmation
from the registrar or transfer agent concerning the:
a. Amount of dividends paid to related parties.
b. Expected proceeds from stock subscriptions receivable.
c. Number of shares issued and outstanding.
d. Proper authorization of stock rights and warrants.

81. Which of the following statements ordinarily is not included among the
written client representations made by the chief executive officer and
the chief financial officer?
a. "Sufficient evidential matter has been made available to the auditor to
permit the issuance of an unqualified opinion."
b. "There are no unasserted claims or assessments that our lawyer has
advised us are probable of assertion and must be disclosed."
c. "We have no plans or intentions that may materially affect the carrying
value or classification of assets and liabilities."
d. "No events have occurred subsequent to the balance sheet date that
would require adjustment to, or disclosure in, the financial
statements."

82. Anauditor plans to apply substantive tests to the details of asset and
liability accounts as of an interim date rather than as of the balance
sheet date. The auditor should be aware that this practice:
a. Eliminates the use of certain statistical sampling methods that
would otherwise be available.
b. Presumes that the auditor will reperform the tests as of the
balance sheet date.
c. Should be especially considered when there are rapidly changing
economic conditions.
d. Potentially increases the risk that errors that exist at the balance
sheet date will not be detected.

83. Whenconducting field work for a physical inventory, an auditor cannot

perform which of the following steps using a generalized audit software
package?
a. Observing inventory.
b. Selecting sample items of inventory.
c. Analyzing data resulting from inventory.
d. Recalculating balances in inventory reports.

84. A disaster recovery plan usually has all of the following elements
except:
a. Identifying users that would be affected.
b. Identifying key personnel responsible for handling recovery
operations.
c. Identifying key applications.
d. Documentation and training.

85. To prevent interrupted information systems operation, which of the

following controls are typically included in an organization's disaster
recovery plan?
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a. Backup and data transmission controls.
b. Data input and downtime controls.
c. Backup and downtime controls.
d. Disaster recovery and data processing controls.

86. What type of computerized data processing system would be most

appropriate for a company that is opening a new retail location?
a. Batch processing. c. Real-time processing.
b. Sequential-file processing. d. Direct-access processing.

87. Which of the following is a computer program that appears to be

legitimate but performs an illicit activity when it is run?
a. Redundant verification. c. Parallel count.
b. Web crawler. d. Trojan horse.

88. Which of the following is included as part of the definition of audit

sampling?
a. Documentation evidence. c. Inquiry and observation procedures.
b. Statistical techniques. d. Evaluation of some characteristic.

89. An advantage of statistical sampling over nonstatistical sampling is

that statistical sampling helps an auditor to
a. Minimize the failure to detect errors and irregularities.
b. Eliminate the risk of nonsampling errors.
c. Reduce the level of audit risk and materiality to a relatively low
amount.
d. Measure the sufficiency of the evidential matter obtained.

90. Whichof the following is an element of sampling risk?

a. Choosing an audit procedure that is inconsistent with the audit
objective.
b. Choosing a sample size that is too small to achieve the sampling
objective.
c. Failing to detect an error on a document that has been inspected by
the auditor.
d. Failing to perform audit procedures that are required by the sampling
plan.

91. Inassessing sampling risk, the risk of incorrect rejection and the risk
of assessing control risk too high relate to the
a. Efficiency of the audit. c. Effectiveness of the audit.
b. Selection of the sample. d. Audit quality controls.

92. Auditors often utilize sampling methods when performing tests of

controls. Which of the following sampling methods is most useful when
testing controls?
a. Attribute sampling.
b. Variable sampling.
c. Unrestricted random sampling with replacement.
d. Stratified random sampling.

93. Which of the following statistical selection techniques is least

desirable for use by an auditor?
a. Systematic selection. c. Stratified selection.
b. Block selection. d. Sequential selection.

94. Anauditor’s purpose in reviewing the renewal of a note payable shortly

after the balance sheet date most likely is to obtain evidence
concerning management’s assertions about
a. Existence or occurrence. c. Presentation and disclosure.
b. Completeness. d. Valuation or allocation.

95. Three-R Corporation acquired a building and arranged mortgage financing

during the year. Verification of the related mortgage acquisition costs
would be least likely to include an examination of the related
a. Deed. c. Cancelled checks.
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 Northern CPAR Final Pre-board Auditing Theory
b. Closing statement. d. Interest expense.

96. An audit program for the examination of the retained earnings account
should include a step that requires verification of the
a. Market value used to charge retained earnings to account for two-for-
one stock split.
b. Approval of the adjustment to the beginning balance as a result of a
write-down of an account receivable.
c. Authorization for both cash and stock dividends.
d. Gain or loss resulting from disposition of treasury shares.

97. The “benchmark” valuation of property, plant and equipment in the

balance sheet of an enterprise is
a. At revalued amount, which equal to the fair value at the date of
revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment loss.
b. Cost of asset, or other amount substituted for cost in the financial
statements less its residual value.
c. Amount of cash or cash equivalent paid or the fair value of other
consideration given to acquire the asset at the time of its
acquisition or construction.
d. Amount which the asset is recognized in the balance sheet after,
deducting any accumulated depreciation and accumulated impairment
losses.

98. The following statements relate to the issuance of certificate of

registration and professional identification card. Which statement is
false?
a. The Certificate of Registration shall bear the signature of the
Chairperson of the Commission and the Chairman and Members of the
Board, stamped with the official seal of the Commission and of the
Board.
b. A professional identification card bearing the registration number,
date of issuance, expiry date, duly signed by the chairperson of the
Commission shall be issued to every registrant.
c. The professional identification card shall be renewed every after 3
years.
d. The only way to obtain a certificate of registration is to take and
pass the Philippine CPA licensure examination.

99. Anyperson who shall violate any of the provisions of the Act, or any of
its implementing rules and regulations as promulgated by the Board
subject to the approval of the Commission shall upon conviction, be
punished by
a. Lethal injection.
b. A fine of not more than fifty thousand pesos.
c. Imprisonment for a period not exceeding two years.
d. a fine of not less than fifty thousand pesos or by imprisonment for a
period not exceeding two years or both.

100. A CPA shall not practice under a firm name that includes or indicates
the following, except
a. Fictitious name
b. Specialization
c. Misleading as to the type of organization
d. Name(s) of past partner(s) in the firm name of successor partnership.
“Flaming enthusiasm, backed up by horse sense and persistence, is the quality that most often
makes for success.” – Dale Carnegie

“A mind troubled by doubt cannot focus on the course to victory.”

“Some people succeed because they are destined to, but most people succeed because they are
determined to.”

 -- END OF FINAL PRE-BOARD-- 

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