1.

An examination of part of an organization's procedures and methods for the

purpose of evaluating efficiency and effectiveness is what type of audit?

a. Operational audit
b. Compliance audit
c. Financial statement audit
d. Production audit

2. An audit to determine whether an entity is following specific procedures or rules

set down by some higher authority is classified as a(n):

a. audit of financial statements.

b. compliance audit.
c. operational audit.
d. production audit.

3. The responsibility for adopting sound accounting policies and maintaining

adequate internal control rests with the:

a. board of directors.
b. company management.
c. financial statement auditor.
d. company's internal audit department.

4. The auditor's best defense when material misstatements in an audit of historical

financial information are not uncovered is to have conducted the audit

a. in accordance with Philippine Standards on Auditing

b. as effectively as reasonably possible.
c. in a timely manner.
d. only after an adequate investigation of the management team.

5. An audit must be performed with an attitude of professional skepticism.

Professional skepticism consists of two primary components: a questioning mind
and

a. the assumption that upper-level management is dishonest.

b. a critical assessment of the audit evidence.
c. the assumption that all employees are motivated by greed.
d. verification of all critical information by independent third parties.

6. Which of the following statements is the most correct regarding errors and fraud?

a. An error is unintentional, whereas fraud is intentional.

b. Frauds occur more often than errors in financial statements.
c. Errors are always fraud and frauds are always errors.
d. Auditors have more responsibility for finding fraud than errors.

7. The essence of the attest function is to:

a. assure the consistent application of correct accounting procedures.

b. determine whether the client's financial statements are fairly stated in
accordance with an applicable financial reporting framework.
c. examine individual transactions so that the auditor may certify as to their validity.
d. detect collusion and fraud.

8. An auditor should recognize that the application of auditing procedures may

produce evidence indicating the possibility of errors or fraud and therefore should

a. plan and perform the engagement with an attitude of professional skepticism.

b. not rely on internal controls that are designed to prevent or detect errors or fraud.
c. design audit tests to detect unrecorded transactions.
d. extend the work to audit the majority of the recorded transactions and records of
an entity

9. Audit evidence has two primary qualities for the auditor relevance and reliability.
Given the choices below, which provides the auditor with the most reliable audit
evidence?

a. General ledger account balances

b. Confirmation of accounts receivable balance received from a customer
c. Intemal memo explaining the issuance of a credit memo
d. Copy of month-end adjusting entries

10. Appropriateness of evidence is a measure of the:

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

11. Which of the following statements regarding the relevance of evidence is

correct?

a. To be relevant, evidence must pertain to the audit objective of the evidence.

b. To be relevant, evidence must be persuasive.
c. To be relevant, evidence must relate to multiple audit objectives.
d. To be relevant, evidence must be derived from a system including effective
internal controls.

12. Which of the following forms of evidence would be least persuasive in forming
the auditor's opinion about marketable securities and other investments held by the
company?

a. Responses to auditor's questions by the president and controller regarding the

investments account
b. Correspondence with a stockbroker regarding the quantity of client's investments
held in street name by the broker
c. Minutes of the board of directors authorizing the purchase of stock as an
investment
d. The auditor's count of marketable securities

13. For audit evidence to be compelling to the auditor it must be sufficient and
appropriate. Which statement below is not correct regarding the appropriateness of
audit evidence?

a. The more effective the internal control system, the more assurance it provides
the auditor about the reliability of financial reporting by the client.
b. An auditor's opinion, to be economically useful and profitable to the auditing firm
needs to be formed within a reasonable time and based on evidence obtained that
assures profits for the auditing firm

14. Which of the following is a correct statement regarding audit evidence?

a. A large sample of evidence provided by an independent party is always

considered persuasive evidence.
b. A small sample of only one or two pieces of highly appropriate evidence is always
considered persuasive evidence.
c. The auditor must obtain a sufficient amount of relevant and reliable evidence to
form an opinion on the fairness of the financial statements.
d. Evidence is usually more reliable for balance sheet accounts when it is obtained
within six months of the balance sheet date.

15. Which of the following is the most objective type of evidence?

a. A letter written by the client's attorney discussing the likely outcome of

outstanding lawsuits
b. The physical count of securities and cash
c. Inquiries of the credit manager about the collectability of noncurrent accounts
receivable
d. Observation of cobwebs on some inventory bins

16. Determine which of the following is most correct regarding the reliability of audit
evidence.

a. Information that is indirectly obtained from external sources is the most reliable
audit evidence.
b. Reliability of audit evidence is dependent upon the evidence being subjective
c. Reliability of evidence refers to the amount of evidence obtained.
d. If internal controls are effective, evidence obtained is more reliable than when
the controls are not effective.

17. Which of the following statements is not a correct statement regarding audit
evidence?

a. Evidence obtained from an independent source outside the client organization is

more reliable than that obtained from within.
b. Documentary evidence is more reliable when it is received by the auditor
indirectly rather than directly.
c. Documents that originate outside the company are considered more reliable than
those that originate within the client's organization.
d. External evidence, such as communications from banks, is generally regarded
as more reliable than answers obtained from inquiries of the client.
18. 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. statistical risk.
d. financial risk.

19. A measure of the auditor's assessment of the likelihood that there are material
misstatements in an account before considering the effectiveness of the client's
internal control is called:

a. control risk.
b. acceptable audit risk.
c. statistical risk.
d. inherent risk.

20. The purpose of an engagement letter is to:

a. document the CPA firm's responsibility to external users of the audited financial
statements.
b. document the terms of the engagement.
c. notify the audil staff of an upcoming engagement so that personnel scheduling
can be facilitated.
d. emphasize management's responsibility for approving the audit program.

21. The preliminary audit strategy:

a. is set before the auditor understands the client's reasons for the audit.
b. guides the development of the audit plan.
c. is determined after the engagement staffing is set.
d. is the detailed steps to be followed for the substantive audit tests.

22. The purpose of the requirement in having communication between the

predecessor and successor auditors is to:

a. allow the predecessor to disclose information which would otherwise be

confidential.
b. help the successor auditor to evaluate whether to accept the engagement.
c. help the client by facilitating the change of auditors
d. ensure the predecessor collects all unpaid fees prior to a change in auditor.

23. When selecting staff for the audit engagement:

a. only staff members who are CPAs should be assigned to the audit.
b. only managers and above need to have appropriate competence and capabilities
to perform the audit.
c. continuity of staff members from year to year should not be a factor.
d. staff assigned to the audit must be knowledgeable about the client's industry.

24. An auditor who accepts an audit engagement and does not possess the industry
expertise of the business entity should

a. engage financial experts familiar with the nature of the business entity.
b. obtain a knowledge of matters that relate to the nature of the entity's business
c. refer a substantial portion of the audit to another CPA who will act as the principal
auditor
d. first inform management that an unqualified opinion cannot be issued

25. Which of the following best describes the objective of an audit of financial
statements?

a. To make recommendations for improving performance.

b. To express an opinion whether the financial statements are prepared, in all
material respects, in accordance with an identified financial reporting framework.
c. To give assurance as to the future viability of the firm.
d. To measure the efficiency and effectiveness with which the management has
conducted the affairs of the entity.

26. Which of the following is not a responsibility of the management?

a. Preparation of financial statements in accordance with applicable financial

reporting framework.
b Design and implementation of internal control
c. Providing the auditor access to all information, records and documents relevant
to the audit
d. Providing the auditor unrestricted access to persons within the entity from whom
the auditor determines it necessary to obtain audit evidence
e. Expression of opinion on the financial statements,

27. The auditor should make a critical assessment, with a questioning mind, of the
validity of the audit evidence obtained. This attitude is:

a. Professional competence
b. Professional behavior
c. Professional skepticism
d. Professional ethics

28. It refers to the audit procedures deemed necessary in the circumstances to

achieve the objective of an audit

a. reasonable assurance
b. audit risk
c. scope of an audit
d. audit procedures

29. It is a concept relating to the accumulation of the audit evidence necessary for
the auditor to conclude that there are no material misstatements in the financial
statements taken as a whole.

a. reasonable assurance
b. absolute assurance
c. persuasive evidence
d. sufficiency of evidence

30. Reasonable assurance is obtained

a. when the auditor has reduced audit risk to an acceptably low level.
b. when the auditor expresses an unqualified opinion.
c. when the auditor and the client have no material disagreement regarding
application of accounting principles.
d. All of the above.

31. For an auditor to be independent, he or she must be independent in

a. fact
b. appearance.
c. fact and appearance.
d. either fact or appearance.

32. Independence is required for which of the following types of services?

a. audits.
b. tax work.
c. consulting
d. always required of the CPA

33. Which of the following statements best describes why the profession of certified
public accountants has deemed it essential to promulgate a code of conduct and to
establish a mechanism for enforcing the observance of the code?

a. A distinguishing characteristic of a profession is its acceptance of responsibility

to the public.
b. A prerequisite to success is the establishment of an ethical code that stresses
primarily the professional's responsibility to clients and colleagues.
c. A requirement of most state laws calls for the profession to establish a code of
conduct.
d. An essential means of self-protection for the profession is the establishment of
flexible ethical standards by the profession.

34. Which of the AASC engagements requires independence?

35. Which of the following statements is correct with regard to the reliability of audit
evidence?

a. The auditor's direct personal knowledge, obtained through observation and

inspection, is more persuasive than information obtained indirectly from
independent outside sources.
b. To be competent, evidential matter must be either valid or relevant but need not
be both.
c. Accounting data alone may be considered sufficient competent evidential matter
to issue an unqualified opinion on financial statements.
d. Competence of evidential matter refers to the amount of corroborative evidence
to be obtained

36. Which of the following is the primary difference between operational auditing
and financial auditing?

a. Operational auditing does not emphasize compliance with specified accounting

standards (e.g.,GAAP)
b. Operational auditing is primarily concerned with whether management is making
efficient use of resources.
c. Operational auditing focuses on specific activities of the organization rather than
the organization as a whole.
d. Operational auditing emphasizes compliance with laws and regulations.

37. Financial statement audits:

a. Reduce the cost of capital

b. Report on compliance with laws and regulations
c. Assesses management's efficiency and effectiveness
d. Overlook information risk

38. Detection risk differs from both control risk and inherent risk in that detection
risk

a Exists independently of the financial statement audit

b. Can be changed at the auditor's discretion.
c. Arises from nsk factors relating to fraud.
d. Should be assessed in nonquantitative terms.

39. Which of the following descriptions best describes inherent risk?

a. Auditors fail to discover a material misstatement in the course of their audit and
do not modify their audit opinion
b. A company's internal control fails to identify a material misstatement in a timely
fashion
c. Auditing procedures fail to find a material misstatement.
d. The possibility that a material misstatement will occur in any given account before
considering internal control
40. Further audit procedures include

a. Risk assessment procedures.

b. Audit planning
c. Tests of controls.
d. Diagrams of transaction cycles

41. The risk that the auditor may unknowingly fail to appropriately modify the
opinion on financial statements that are materially misstated is referred to as

a. Audit risk.
b. Detection risk.
c. Information risk
d. Business risk

42. Which of the following best describes what is meant by auditing standards in
contrast to audit procedure?

a. Acts to be performed by the auditor

b. Measures of the quality of the auditor's performance
c. Procedures to be used to gather evidence to support financial statements
d. Audit objective generally determined on audit engagements.

43. _______ risk reflects the possibility that the information upon which the
business decision was made was inaccurate

a. Client acceptance
b. Information
c. Business
d. Control

44. One objective of an operational audit is to:

a determine whether the financial statements fairly present the entity's operations.
b. determine if the auditee i is in compliance with GAAP.
c. make recommendations for improving performance.
d. report on the entity's relative success in attaining profit maximization.
45. Which of the following is not a basic procedure used in an audit?

a. Risk assessment procedures

b. Substantive procedures
c. Tests of controls
d. Tests of direct evidence

46. Which of the following is not a financial statement assertion relating to account
balances?

a. Completeness
b. Existence
c. Rights and obligations
d. Valuation and allowances

47. Which of the following is generally true about the sufficiency of audit evidence?

a. The amount of evidence that is sufficient 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

48. Which of the following is true about analytical procedures?

a. Performing analytical procedures results in the most reliable form of evidence

b Analytical procedures are tests of controls used to evaluate the quality of a client's
internal control
c. Analytical procedures are used for planning, but they should not be used to obtain
evidence as to the reasonableness of specific account balances.
d. Analytical procedures are used in planning, as a substantive procedure for
specific accounts, and in the final review of the audited financial statements

49. A schedule set up to combine similar general ledger accounts, the total of which
appears on the working trial balance as a single amount, is referred to as a
a. Supporting schedule
b. Lead schedule
c. Corroborating schedule
d. Reconciling schedule

50. Which of the following is not a function of working papers?

a. Provide support for the auditors' report

b. Provide support for the accounting records
c. Aid partners in planning and conducting future audits
d. Document staff compliance with generally accepted auditing standards

51. A schedule listing account balances for the current and previous years, and
columns for adjusting and reclassifying entries proposed by the auditors to arrive
at the final amount that will appear in the financial statement, is referred to

a. Working trial balance

b. Lead schedule
c. Summarizing schedule
d. Supporting schedule

52. The auditors use analytical procedures during the course of an audit. The most
important phase of performing these procedures is the:

a Vouching of all data supporting various ratios

b. Investigation of significant variations and unusual relationships
c. Comparison of client-computed statistics with industry data on a quarterly and
full-year basis
d. Recalculation of industry date

53. Which of the following ultimately determines the specific audit procedures
necessary to provide independent auditors with a reasonable basis for the
expression of an opinion?

a. The audit time budget

b. The auditors' judgment
c. Generally accepted accounting quality standards
d. The auditors' working papers
54. Which of the following is not an appropriate auditor's overall response to risk of
material misstatement at financial statements level?

a. assigning more experienced staff or those with special skills or using experts
b. providing more supervision
c. incorporating additional elements of unpredictability in the selection of further
audit procedures to be performed.
d. conducting some audit procedures at an interim date rather than at period end if
control environment is effective.
e. Performing substantive testing.

55. The auditor who is developing overall response to assessed risks of material
misstatement at financial statements level has determined that there are
weaknesses in control environment of the client. Which of the following is not an
appropriate response to weaknesses in the control environment?

a. perform greater audit procedures at interim date.

b. conducts more audit procedures as of the period end rather than at an interim
date.
c. seeks more extensive audit evidence from substantive procedures.
d. modifies the nature of audit procedures to obtain more persuasive audit
evidence.

56. Risks of material misstatements that do not relate pervasively to the financial
statements are the

a. Inherent risk and control risk

b. Control risk and detection risk
c. Inherent risk and detection risk
d. Inherent risk and audit risk

57. Effective internal control in a small company that has an insufficient number of
employees to permit proper division of responsibilities can be enhanced by

a. Employment of temporary personnel to aid in the separation of duties

b. Direct participation by the owner of the business in the record-keeping activities
of the business
c. Engaging a CPA to perform monthly "write-up" work
d. Delegation of full, clear cut responsibility to each employee for the functions
assigned to each

58. Which of the following best describes the inherent limitations that should be
recognized by an auditor when considering the potential effectiveness of a system
of intemal accounting control?

a. Procedures whose effectiveness depends on segregation of duties can be

circumvented by collusion
b. The competence and integrity of client personnel provides an environment
conducive to accounting control and provides assurance that effective control will
be achieved
c. Procedures designed to assurance the execulion and recording of transactions
in accordance with proper authorizations are effective against irregularities
parpetrated by management
d. The benefits expected to be derived from effective internal accounting control
usually do not exceed the costs of such control

59. A system of internal control, regardless of how carefully designed and

implemented, contains certain inherent limitations. Which of the following errors or
irregularities is not caused by an inherent limitation?

a. The president and chief executive officer, with the assistance of the corporate
controller, inflated earnings by recording fictitious sales at year-end.
b. A newly installed electronic data processing system failed to provide for a
comparison of sales order amount with prior customer balance and credit limit. This
resulted in numerous sales to customers who had already exceeded their credit
limits
c. Numerous recording errors occurred because person analyzing and recording
transactions did not have the necessary accounting background
d. A computer programmer and a computer operator conspired to divert funds from
the company to an account controlled by the dishonest employees

60. Which of the following characteristics most likely would heighten an auditor's
concem about the risk of material misstatements in an entity's financial statements?

a. The entity's industry is experiencing declining customer demand.

b. Employees who handle cash receipts are not bonded.
c. Bank reconciliations usually include in-transit deposits.
d. Equipment is often sold at a loss before being fully depreciated.
61. Which of the following is not an element of the internal control environment?

a. management philosophy and operating style

b. organizational structure of the firm
c. well-designed documents and records
d. the functioning of the board of directors and the audit committee

62. Which of the following suggests a weakness in the internal control environment?

a. the firm has an up-to-date organizational chart

b. monthly reports comparing actual performance to budget are distributed to
managers
c. performance evaluations are prepared every three years
d. the audit committee meets quarterly with the external auditors

63. Which of the following indicates a strong internal control environment? 63

a. the internal audit group reports to the audit committee of the board of directors
b. there is no segregation of duties between organization functions
c. there are questions about the integrity of management
d. adverse business conditions exist in the industry

64. Audit plan shall include detailed description of the following, except:

a. characteristics of the engagement that define the scope of the audit.

b. nature, timing and extent of planned RAP
c. nature, timing and extent of planned FAP
d. other planned audit procedures

65. Duing an audit engagement pertinent data are prepared and included in the
audit working papers. The working papers primarily are considered to be:

a. A client-owned record of conclusions reached by the auditors who performed the

engagement.
b. Evidence supporting financial statements.
c. Support for the auditors' representations as to compliance with PSA.
d. A record to be used as a basis for the following year's engagement.