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INTRODUCTION TO ASSURANCE, NON-ASSURANCE AND AUDITING

1. Which of the following is always present in an attestation engagement?
A. Subject matter
B. An examination report
C. Assertion about the subject matter
D. Generally accepted assurance principles

2. Broadly defined, the subject matter of any audit consists of

A. Financial statements
B. Operating data
C. Economic data
D. Assertions

3. The need for assurance services arises for all of the following reason except
A. Potential bias in providing information
B. Closeness between a user and the organization
C. Complexity of the processing systems
D. Remoteness between a user and the organization

4. Which of the following procedures would be most e ective in reducing assurance engagement risk?
A. Discussion with responsible individuals.
B. Inquiries of senior management.
C. Examination of evidence.
D. Analytical procedures.

5. Which of the following presumptions is correct about the reliability of audit evidence?
A. Information obtained indirectly from outside sources is the most reliable evidential matter.
B. To be reliable, audit evidence should be conclusive rather than persuasive.
C. Reliability of audit evidence refers to the amount corroborative evidence obtained.
D. An e ective internal control structure provides more assurance about the reliability of audit evidence.

6. Su icient competent evidential matter may in part be obtained through the following methods except
A. Inspection
B. Observation
C. Confirmation
D. Reconciliation

7. The "hallmark" of auditing is

A. Available audit technology.
B. Generally accepted auditing standards.
C. Professional judgment.
D. Materiality and audit risk.

8. Statement 1: The risk that information is misstated is referred to as information risk.

Statement 2: The risk associated with a company's survival and profitability is referred to as business risk.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

9. Statement 1: The auditors are primarily responsible for preparing the financial statements and expressing an
opinion on whether they follow generally accepted auditing standards.
Statement 2: Partners in CPA firms usually have the responsibility of delegating the signing of the audit report.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect
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10. Which of the following types of services is generally provided only by CPA firms?
A. Tax audits
B. Financial statement audits
C. Compliance audits
D. Operational audits

11. A typical objective of an operational audit is for the auditor to:

A. Determine whether the financial statements fairly present the entity's operations.
B. Evaluate the feasibility of attaining the entity's operational objectives.
C. Make recommendations for improving performance.
D. Report on the entity's relative success in attaining profit maximization.

12. The accountant who is not independent may perform which of the following types of engagements?
A. Audit
B. Agreed-upon procedures
C. Compilation
D. Review

OVERVIEW OF THE AUDIT PROCESS AND PRELIMINARY ENGAGEMENT ACTIVITIES

13. Which of the following is not one of the assertions made by management about an account balance?
A. Relevance
B. Existence
C. Valuation
D. Rights and obligations

14. Which one of the following is not part of the attest process?
A. Providing the accuracy of the books and records.
B. Gathering evidence about assertions.
C. Evaluating evidence against objective criteria.
D. Communicating the conclusions reached.

15. Auditors must not only decide whether to accept new clients; they also should periodically review their list of
current clients and remove those clients the firm no longer wants to be associated with. Reasons for
discontinuing clients might include the following, except:
A. Di iculty in working with client personnel.
B. Inability to negotiate an acceptable increase in the audit fee.
C. Evidence indicating a client’s management has integrity.
D. Client need for specialized services the current firm is unable or unwilling to provide.

16. A predecessor auditor is required to attempt to initiate communication with the successor auditor:
I. Prior to the incoming auditor’s acceptance of the engagement
II. Subsequent to the incoming auditor’s acceptance of the engagement
A. I only
B. II only
C. Both I and II
D. Neither I nor II

AUDIT PLANNING
17. Audit plans are designed so that
A. The auditor’s conclusions are supported by audit evidence gathered
B. Major audit procedures can be performed as at interim work
C. Inherent risk is assessed at a su iciently low level
D. Management letter points can be shared to the client
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18. Statement 1: Audit committees should be made up of the most qualified directors regardless of whether they
are part of management of the company.
Statement 2: In planning an audit, the auditor may decide that it is appropriate to perform substantive
approach to an audit for many small businesses.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

19. The auditors will not ordinarily initiate discussion with the audit committee concerning the:
A. Extent to which the work of internal auditors will influence the scope of the examination.
B. Extent to which change in the company's organization will influence the scope of the examination.
C. Details of potential problems which the auditors believe might cause a qualified opinion.
D. Details of the procedures which the auditors intend to apply.

20. Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client's
management. Which of the following matters do the auditor and management agree upon at this time?
A. The coordination of the assistance of the client's personnel in data preparation.
B. The determination of the fraud risk factors that exist within the client's operations.
C. The appropriateness of the entity's plans for dealing with adverse economic conditions.
D. The control weaknesses to be included in the communication with those charged with governance.

21. Which of the following is/are correct?

Statement 1: The auditor shall perform risk assessment procedures to provide a basis for the identification
and assessment of risk of material misstatement at financial statement and assertion levels.
Statement 2: Risk assessment procedures by themselves provide su icient appropriate audit evidence on
which to base the opinion.
A. Only statement 1 is correct
B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

22. To obtain an understanding of a continuing client's business in planning an audit, an auditor most likely would:
A. Perform tests of details of transactions and balances.
B. Review prior-year audit documentation and the permanent file for the client.
C. Read specialized industry journals.
D. Reevaluate the client's internal control environment.

23. In what order should the following steps occur?

I. Assess client business risk
II. Understand the client’s business and industry
III. Perform preliminary analytical procedures
IV. Assess acceptable audit risk
A. IV, II, III, I
B. II, I, IV, III
C. II, IV, I, III
D. IV, III, II, I

24. Most auditors assess inherent risk as high for related parties and related-party transactions because:
A. of the unique classification of related-party transactions required on the balance sheet.
B. of the lack of independence between the parties.
C. of the unique classification of related-party transactions required on the income statement.
D. it is required by generally accepted accounting principles.

25. Which of the following courses of action is the most appropriate if an auditor concludes that there is a high risk
of material misstatement?
A. Increase of tests of controls
B. Select more e ective substantive tests
C. Use smaller, rather than larger, sample sizes
D. Perform substantive tests as of an interim date
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26. Which of the following components of audit risk may be assessed in quantitative terms?
I. Inherent risk
II. Control risk
III. Detection risk
A. I and II only
B. I and III only
C. II and III only
D. I, II and III

27. Which measure of materiality (or both) considers quantitative considerations?

I. Planning
II. Evaluation
A. I only
B. II only
C. Both I and II
D. Neither I nor II

STUDY AND EVALUATION OF INTERNAL CONTROL

28. Which of the following is true about the auditors' consideration of internal control in a financial statement audit?
A. The auditors must assess control risk at a level lower than the maximum.
B. The auditors must prepare a flowchart description of internal control for their working papers.
C. The auditors must obtain an understanding of the steps in processing major types of transactions.
D. The auditors must perform tests of controls.

29. Statement 1: The relatively low number of types of transactions incurred by small firms makes the segregation of
duties impossible.
Statement 2: In a financial statement audit, CPAs are required to assess the operating e ectiveness of most
significant accounting-oriented controls.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

30. Which of the following is most likely to be considered a risk assessment procedure relating to internal control?
A. Confirm accounts receivable.
B. Perform a test of a control relating to payroll.
C. Take test counts of the year-end inventory.
D. Trace a transaction through the information system relevant to financial reporting.

31. In an auditor's consideration of internal control, the completion of a questionnaire is most closely associated
with which of the following?
A. Separation of duties.
B. Understanding the system.
C. Flowchart accuracy.
D. Tests of controls.

32. Statement 1: The auditors' tests of controls are designed to substantiate the fairness of specific financial
statement accounts.
Statement 2: At least a portion of the auditor’s consideration of internal control usually is performed at an
interim date rather than at the balance sheet date.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect
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33. After consideration of a client's internal control, an auditor might decide to

A. Increase the extent of substantive testing in areas where the control structure is strong.
B. Reduce the extent of tests of controls in areas where the controls are strong.
C. Reduce the extent of both substantive tests and tests of controls in areas where the controls are strong.
D. Increase the extent of substantive testing in areas where the controls are weak.

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

35. When assessing control risk at the maximum level, an auditor is required to document the auditor’s
I. Understanding of the entity’s internal control
II. Assessment of control risk at the maximum level
III. Basis for concluding that control risk is at the maximum level
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III

AUDITING IN AN IT ENVIRONMENT
36. System characteristics that may result from the nature of CIS processing include, except
A. Absence of input documents.
B. Lack of visible transaction trail.
C. Lack of visible output.
D. Di iculty of access to data and computer programs.

37. When companies use information technology extensively, evidence may be available only in electronic form.
What is an auditor's best course of action in such situations?
A. Assess the control risk as high.
B. Use audit software to perform analytical procedures.
C. Perform limited tests of controls over electronic data.
D. Use generalized audit software to extract evidence from client databases.

38. Which of the following is not a purpose of an auditor's attempt to understand internal control when a client
processes accounting information by computer?
A. Determine the extent to which the computer is used in significant accounting applications.
B. Understand the flow of transactions in the system.
C. Comprehend the basic structure of accounting control.
D. Identify the controls that can be relied on when designing substantive tests of details.

39. Preventing someone with su icient technical skill from circumventing security procedures and making
changes to production programs is best accomplished by
A. Reviewing report of jobs completed
B. Comparing production programs with independently controlled copies
C. Running test data periodically
D. Providing suitable segregation of duties

40. Internal control is ine ective when computer department personnel:

A. Participate in computer software acquisition decisions.
B. Design documentation for computerized systems.
C. Originate changes in master files.
D. Provide physical security for program files.
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41. Which of the following is least likely to be a general control over computer activities?
A. Procedures for developing new programs and systems.
B. Requirements for system documentation.
C. A change request log.
D. A control total.

42. Statement 1: Auditors usually begin their consideration of IT systems with tests of application
controls.
Statement 2: Generalized audit software may be used for substantive tests or for tests
of controls.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

43. Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be
processed together without client operating personnel being aware of the testing process?
A. Integrated test facility
B. Input controls matrix
C. Parallel simulation
D. Data entry monitor

BUSINESS PROCESSES (TRANSACTION CYCLES)

44. In describing the cycle approach to segmenting an audit, which of the following statements is not true?
A. All general ledger accounts and journals are included at least once.
B. Some journals and general ledger accounts are included in more than one cycle.
C. The “capital acquisition and repayment” cycle is closely related to the “acquisition of goods and
services and payment” cycle.
D. The “inventory and warehousing” cycle may be audited at any time during the engagement since it is
unrelated to the other cycles.

45. Which of the following journals would be included most often in the various audit cycles?
A. Cash receipts journal.
B. Cash disbursements journal.
C. General journal.
D. Sales journal.

46. To test for unsupported entries in the ledger, the direction of audit testing should be from the
A. Journal entries
B. Ledger entries
C. Original source documents
D. Externally generated documents

47. Which of the following best represents a key control for ensuring sales are properly authorized when
assessing control risks for sales?
A. The separation of duties between the billing department and the cash receipts approval department.
B. The use of an approved price list to determine unit selling price.
C. Copies of approved sales orders are sent to the shipping, billing, and accounting departments.
D. Sales orders are sent to the credit department for approval.

48. Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared
shipping documents provides evidence that:
A. Shipments to customers were properly billed.
B. Entries in the accounts receivable subsidiary ledger were for sales actually shipped.
C. Sales billed to customers were actually shipped.
D. No duplicate shipments to customers were made.
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49. To determine whether internal control operates e ectively to minimize errors of failure to post invoices to the
customer’s accounts ledger, the auditor would select a sample of transactions from the population
represented by the
A. Bill of lading file
B. Sales invoice file
C. Customer order file
D. Subsidiary customer accounts ledger

50. The primary audit objective regarding the purchasing of materials by the client is to
A. Ascertain that materials paid for are on hand.
B. Observe the annual physical count.
C. Investigate the recording of unusual transactions regarding materials.
D. Determine the reliability of financial reporting by the purchasing function.

51. Which of the following controls is most e ective in assuring that recorded purchases are free of material errors?
A. The receiving department compares the quantity ordered on purchase orders with the quantity received on
receiving reports.
B. Vendor’s invoices are compared with purchase orders by an employee who is independent of the
receiving department.
C. Receiving reports require the signature of the individual who authorized the purchase.
D. Purchase orders, receiving reports, and vendor’s invoices are independently matched in preparing vouchers.

CONSIDERATION OF FRAUD, ERROR, AND NON-COMPLIANCE

52. Audits of financial statements are designed to obtain assurance of detecting material misstatements due to the
following:
A. Errors, fraudulent financial reporting, misappropriation of assets.
B. Errors and fraudulent financial reporting.
C. Errors and misappropriation of assets.
D. Fraudulent financial reporting.

53. Misstatement in the financial statements can arise from the 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
B. II only
C. Both I and II
D. Neither I nor II

54. “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 a ect 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.

55. Which of the following statements is/are correct?

Statement 1: The auditor is not and cannot be held responsible for the prevention of fraud and error.
Statement 2: Annual audits carried out may not act as deterrent of fraud and error.
A. Only statement 1 is correct
B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect
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56. Which of the following characteristics most likely would heighten an auditor's concern about the risk
of material misstatement arising from fraudulent financial reporting?
A. There is a lack of interest by management in maintaining an earnings trend.
B. Computer hardware is usually sold at a loss before being fully depreciated.
C. Management had frequent disputes with the auditor on accounting matters.
D. Monthly bank reconciliations usually include several large checks outstanding.

57. When a possible non-compliance is identified, the auditor would:

I. Understand the nature of the act and the circumstances in which it has occurred
II. Obtain further information to evaluate the possible e ect on the financial statements
A. I only
B. II only
C. Both I and II
D. Neither I nor II

58. If the auditor has identified or suspects a fraud, the auditor shall determine whether law, regulation or
relevant ethical requirements prescribe the following:
I. Require the auditor to report to an appropriate authority outside the entity.
II. Establish responsibilities under which reporting to an appropriate authority outside the entity may be
appropriate in the circumstances.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

59. Which of the following statements is/are correct?

I. The auditor is responsible for obtaining reasonable assurance that the financial statements, taken as a
whole, are free from misstatement, whether caused by fraud or error
II. It is the responsibility of those charged with governance, with the oversight of management, to ensure that
the entity’s operations are conducted in accordance with the provisions of laws and regulations
III. Non-compliance with laws and regulations may result in fines, litigation or other consequences that
may have a material e ect on the financial statement
A. Only one statement is true
B. Only two statements are true
C. All statements are true
D. None of the statements are true

EVIDENCE AND PERFORMANCE OF SUBSTANTIVE TESTING

60. Which of the following ultimately determines the specific audit procedures necessary to provide an
independent auditor with a reasonable basis for the expression of an opinion?
A. The audit program.
B. The auditor's judgment.
C. Generally accepted auditing standards.
D. The auditor's working papers.

61. Which of the following is generally true about the su iciency of audit evidence?
A. The amount of evidence that is su icient varies inversely with the risk of material misstatement.
B. The amount of evidence concerning a particular account varies inversely with the materiality of the account.
C. The amount of evidence concerning a particular account varies inversely with the inherent risk of the account.
D. When evidence is appropriate with respect to an account it is also sufficient.

62. The objective of tests of details of transactions performed as substantive tests is to

A. Comply with generally accepted auditing standards.
B. Attain assurance about the reliability of the accounting system.
C. Detect material misstatements in the financial statements.
D. Evaluate whether management's policies and procedures operated effectively.

63. In achieving the existence objective of the auditor for an asset, the most likely population of audit interest is
A. Underlying accounting records to the supporting documentation
B. Financial statements to the related disclosure notes
C. Process documents to accounting records
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D. Third party data to data logs

64. What is the objective of the auditor in performing test of details?

A. To comply with Philippines Standards on Auditing
B. To obtain reasonable assurance as to the e ectiveness of relevant controls
C. To detect material misstatements in the financial statements
D. To evaluate the business rationale of unusual business transactions

65. When the recipient has accomplished the confirmation request, replies should be:
A. Sent directly to the auditor
B. Sent directly to the client, after which the client gives the replies to the auditor
C. Sent directly to the auditor, with another copy of the reply going to the client
D. Not sent back since a confirmation request does not necessitate replies

66. Negative confirmation requests may be used when:

A. A substantial number of errors is expected
B. A large number of balances is involved
C. The assessed levels of inherent and control risks are high
D. The auditor has no reason to believe that respondents will disregard these requests

67. Which of the following statements is incorrect about accounting estimates?

A. Management is responsible for making accounting estimates included in the financial statements.
B. When evaluating accounting estimates, the auditor should pay particular attention to assumptions that
are objective and are consistent with industry patterns.
C. The risk of material misstatement is greater when accounting estimates are involved.
D. The evidence available to support an accounting estimate will often be more di icult to obtain and less
conclusive than evidence available to support other items in the financial statements.

68. The primary di erence between an audit of the statement of financial position and an audit of the statement
of profit or loss is that the audit of the income statement deals with the verification of:
A. transactions.
B. authorizations.
C. costs.
D. cutoffs.

69. Which of the following are normally audited (substantive) together?

A. Accounts Receivable and Accounts Payable
B. Interest Receivable and Interest Payable
C. Salaries Expense and Salaries Payable
D. Depreciation and Amortization

70. Which assertion and major risk is relevant to accounts receivables?

A. Completeness, Overstatement
B. Completeness, Understatement
C. Existence, Overstatement
D. Existence, Understatement