Basic Concepts (Preface and Framework)

1. Assurance engagement risk is the risk

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

2. Information asymmetry seldom occurs.

Conflicts of interest often occur between absentee owners and managers.

a. Both statements are true.

b. Both statements are false.
c. First statement is true; second statement is false.
d. First statement is false, second statement is true.

3. Operational auditing is primarily oriented toward

a. Past protection provided by existing internal control.
b. Future improvements to accomplish the goals of management.
c. The accuracy of data reflected in management’s financial records.
d. The verification that a company’s financial statements are fairly presented.

Audit Planning (PSA 200, 210, 220, 300, 315, 320, 405, 520)

4. The preliminary assessment of control risk is the process of evaluating the efficiency of an entity’s
accounting and internal control systems in preventing or detecting and correcting material
misstatements.

The auditor should document in the audit working papers the understanding obtained of the entity’s
accounting and internal control systems and the assessment of control risk.

There will always be some control risk because of the inherent limitations of any accounting and
internal control systems.

a. False, True, True

b. True, True, False
c. False, False, True
d. True, False, True

5. Which of the following statements regarding auditor documentation of the client’s internal control
structure is correct?
a. Documentation must include flowcharts.
b. Documentation must include procedural write-ups.
 c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary, and the extent of documentation may vary.

6. Jade & Co. CPAs’ policies require that all members of the audit staff submit weekly time reports to the
audit manager, who then prepares a weekly summary work report regarding variance from budget for
Jade’s review. This provides written evidence of Jade & Co.’s professional concern regarding
compliance with which of the following generally accepted auditing standards?
a. Quality control.
b. Adequate review.
c. Due professional care.
d. Adequate planning.

7. During an audit engagement, pertinent data are compiled 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 auditor’s representations as to the compliance with relevant PSAs.
d. A record to be used as a basis for the following year’s engagement.

8. When considering internal controls, an auditor must be aware of the concept of reasonable assurance
which recognizes that the
a. Employment of competent personnel provides assurance that management’s control objectives
will be achieved.
b. Establishment and maintenance of internal control is an important responsibility of the
management and not of the auditor.
c. Cost of internal control should not exceed the benefits expected to be derived therefrom.
d. Separation of incompatible functions is necessary to ascertain that the internal control is
effective.

Auditor’s Professional and Legal Liab. (PSQC, Code of Ethics, RA 9298, PSA 240, 250, 260, 265, 600,
610, 620)

9. The following are examples of circumstances that may create familiarity threats, except
a. Promoting shares in a listed entity when that entity is a financial statement audit client.
b. Long association of senior personnel with the assurance client.
c. A member of the engagement team having a close or immediate family relationship with a
director or officer of the client.
d. A former partner of the firm being a director or officer of the client or an employee in a position
to exert direct and significant influence over the subject matter of the engagement.

10.Which of the following is not one of the grounds for proceeding against a CPA?
a. Issuing an unqualified opinion on financial statements despite limited scope of the examination
preventing the CPA from performing audit procedures necessary in the circumstances.
b. Placing a full-page ad in newspapers claiming to offer the best audit services to clients.
c. Refusing to pay PICPA membership dues.
d. Conviction by a court for bigamy.
11.Fraud refers to an intentional act by one or more individuals among management, employees, or third
parties, which results in a misrepresentation of financial statements while errors refers to
unintentional mistakes in financial statements. Fraud may involve.
1. Manipulation, falsification or alteration of records or documents.
2. Misappropriation of assets.
3. Mathematical or clerical mistakes in the underlying records and accounting data.
4. Suppression or omission of the effects of transactions from records or documents.
5. Oversight or misinterpretation of facts
6. Recording of transactions without substance.
7. Misapplication of accounting policies.

a. 1, 2, 4, 6 and 7
b. 1, 2, 3, 4, 6 and 7
c. 1, 2, 3, and 6
d. 1, 2, 4, 5, and 6

12.As used in PSA 250 (Consideration of Laws and Regulations in an Audit of Financial Statements), this
term refers to acts of omission or commission by the entity being audited, either intentional or
unintentional, which are contrary to prevailing laws or regulations.
a. Noncompliance c. Erotic acts
b. Illegal acts d. Unforgivable acts

13.These are matters that arise from the audit of financial statements and, in the opinion of the auditor,
are both important and relevant to those charged with governance in overseeing the financial
reporting and disclosure process.
a. Material weaknesses in internal control.
b. Audit matters of governance interest.
c. Reportable conditions.
d. None of these terms apply to the above description.

14.Miguel & Co., a large international public accounting firm, is due to have a peer review. The peer
review will most likely be performed by
a. Employees and partners of Miguel & Co. who are not associated with the particular audit being
reviewed.
b. Audit review staff of the Securities and Exchange Commission.
c. Audit review conducted by the Public Company Accounting Oversight Board (PCAOB).
d. Employees and partners of another firm.

15.Which of the following is ordinarily considered to be a fraud risk factor?

a. Management regularly informs investors of forecast information.
b. The company has experienced increasing earnings over the previous five years.
c. The company’s president is included as a member of the board of directors.
d. The company’s financial statements include a number of last minute material adjustments.

Audit Evidence (PSA 500, 501, 505, 510, 520)

16.Which of the following statements is not true regarding the competence of audit evidence?
a. Relevance is enhanced by an effective information system.
 b. To be competent, evidence must be both valid and relevant.
c. Validity is related to the quality of the client’s information system.
d. Relevance must always relate to audit objectives.

17.An auditor should be able to collect and evaluate documentary evidence. When evaluating and
interpreting evidence, the auditor must be concerned about drawing unwarranted conclusions. An
example of a valid conclusion is
A. Correct inventory valuation determined from observation of physical inventory counts.
B. Proper accounts payable cutoff at year-end determined from a review of raw materials
requisition.
C. Existence of a company car determined from the examination of a paid invoice.
D. Client ownership determined from outside inquiries about consigned goods.

18.If the current period’s accounting policies have not been consistently applied in relation to opening
balances and if the change has not been properly accounted for or disclosed, the auditor should issue
either a(an)
a. Qualified or disclaimer of opinion
b. Qualified or adverse opinion
c. Adverse or disclaimer of opinion
d. Standard unqualified opinion or unqualified opinion with explanatory paragraph.

19.Which of the following statements is correct concerning the use of negative confirmation request?
a. Unreturned negative confirmation requests rarely provide significant explicit evidence.
b. Negative confirmation requests are effective when detection risk is low.
c. Unreturned negative confirmation requests indicate that alternative procedures are
necessary.
d. Negative confirmation requests are effective when understatements of account balances are
suspected.

20.Analytical procedures performed in the overall review stage of an audit suggest that several accounts
have unexpected relationships. The results of these procedures most likely indicate that
a. Irregularities exist among the relevant account balances.
b. Internal control procedures are not operating effectively.
c. Additional tests of details are required.
d. The communication with the audit committee should be revised.

Completion of Audit (PSA 550, 560, 570, 580)

21.Which of the related party transactions, an auditor places primary emphasis on

a. Confirming the existence of the related parties.
b. Verifying the valuation of the related party transactions.
c. Evaluating the disclosure of the related party transactions.
d. Ascertaining the rights and obligations of the related parties.

22.Which of the following statements that relate to subsequent events is inappropriately described?
a. The auditor is expected to conduct a continuing review of all matters to which previously
applied procedures have provided satisfactory conclusions.
b. The auditor should consider the effect of subsequent events on the financial statements and
on the auditor’s report.
 c. The procedures to identify events that may require adjustment of, or disclosure in, the
financial statement would be performed.
d. The procedures that are designed to obtain sufficiently appropriate audit evidence that all
events up to the date of the audit report that may require adjustment of, or disclosure in, the
financial statements are in addition to routine procedures which may be applied to specific
transactions.

23.Which of the following least likely is an action that may mitigate an entity’s difficulty to continue as a
going concern?
a. Increased cash dividends.
b. Retirement of outstanding capital stock in order to improve earnings per share.
c. Retirement of long-term debt in order to improve profitability.
d. Disposal of property in a sale-leaseback arrangement.

24.When considering the use of management’s written representation as audit evidence about the
completeness assertion, an auditor should understand that such representations
a. Are not part of the evidential matter considered to support the assertion.
b. Complement, but do not replace, substantive test designed to support the assertion.
c. Replace reliance on internal accounting controls as evidence to support the assertion.
d. Constitute sufficient evidence to support the assertion when considered in combination with
reliance on internal accounting controls.

Audit Report (PSA 700, 701, 705, 706, 710, 720, 800, 805, 810) – 6

25. When the financial statements contain material but not pervasive misstatements because the
accounting policies selected are not consistent with the applicable financial reporting framework, the
auditor should
a. Express a qualified opinion and describe the matter giving rise to the modification in a separate
paragraph.
b. Express a qualified opinion and describe the matter giving rise to the modification within the
opinion paragraph.
c. Disclaim an opinion and describe the matter giving rise to the modification in a separate
paragraph.
d. Disclaim an opinion and describe the matter giving rise to the modification within the opinion
paragraph.

26. Without affecting the CPA’s willingness to express an unmodified opinion on the client’s financial
statements, corporate management may refuse a request to
a. Authorize its attorney to confirm that a list of pending or threatened litigation prepared by
management includes all items known to the attorney.
b. Change its basis of accounting for inventories from first-in, first-out (FIFO) method to weighted
average method.
c. Write down to salvage value certain equipment that is no longer useful.
d. Allow the CPA to examine tax returns for years prior to that of the financial statements being
audited.

27.An auditor concludes that there is a material inconsistency in the other information in an annual report
to shareholders containing audited financial statements. The auditor believes that the financial
 statements do not require revision, but the client is unwilling to revise or eliminate the material
inconsistency in the other information. Under these circumstances, what action would the auditor
most likely take?
a. Consider the situation closed because the other information is not in the audited financial
statements.
b. Issue an “except for” qualified opinion after discussing the matter with the client’s audit committee.
c. Disclaim an opinion on the financial statements after explaining the material inconsistency in a
separate “Other Information” section following the Basis for Opinion Section.
d. Revise the auditor’s report to include a separate section with a heading “other information”
describing the uncorrected material misstatement of the other information.

28.Special purpose frameworks do not include

a. A tax basis of accounting for a set of financial statements that accompany an entity’s tax return.
b. The cash receipts and disbursements basis of accounting for cash flow information that an entity
may be requested to prepare for creditor.
c. The financial reporting provisions established by a regulator to meet the requirements of that
regulator.
d. PFRS for SMEs, PFRS for SEs and full PFRS.

29.Which of the following best describes the auditor’s responsibility for “other information” included in
the annual report to stockholders which contains financial statements and the auditor’s report?
a. The auditor has no obligation to read the “other information.”
b. The auditor has no obligation to corroborate the “other information,” but should read the
“other information” to determine whether it is material inconsistent with the financial
statements.
c. The auditor should extend the examination to the extent necessary to verify the “other
information.”
d. The auditor must modify the auditor’s report to state that the “other information is
unaudited” or “not covered by the auditor’s report.”

30.During the year, the research staff of Buni Co. devoted its entire efforts toward developing a skin
cancer ointment. All costs that could be attributed directly to the project were accounted for as
deferred charges and classified on the statement of financial position as an asset. if the amounts
involved are material, the auditor should
a. Express an unmodified opinion with an emphasis of matter paragraph explaining the uncertainty
of cost recovery.
b. Disclaim an opinion.
c. Express an adverse opinion.
d. Express an unmodified opinion provided that the uncertainty about ultimate realization of the
deferred charges is disclosed in the notes.

Other Assurance Services

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

32.An accountant may accept an engagement to apply agreed-upon procedures that are not sufficient to
express an opinion on one or more specified accounts or items of a financial statement provided that
a. The accountant’s report does not enumerate the procedures performed.
b. The financial statements are prepared in accordance with a comprehensive basis of accounting
other than generally accepted accounting principles.
c. Distribution of the accountant’s report is restricted.
d. The accountant is also the entity’s continuing auditor.

33.Which of the following best describes the responsibility of the CPA in performing compilation services
for a company?
a. The CPA must understand the client’s business and accounting methods, and read the financial
statements for reasonableness.
b. The CPA has only to satisfy himself or herself that the financial statements were prepared in
conformity with PFRS.
c. The CPA should obtain an understanding of internal control and perform tests of controls.
d. The CPA is relieved of any responsibility to third parties.

34.The objective of a review engagement

a. Is to provide the auditor to express an opinion whether the financial statements are prepared in
all material respects, in accordance with an identified financial reporting framework.
b. Is to enable the practitioner to state whether, on the basis of procedures which do not provide all
the evidence that would be required in an audit, anything has come to the practitioner’s attention
that causes the practitioner to believe that the financial statement are not prepared in all material
respects, in accordance with an identified financial reporting framework.
c. Is to carry out those procedures of an audit nature to which the auditor and the entity and any
appropriate third parties have agreed and to report on factual findings.
d. Is to use accounting expertise as opposed to auditing expertise to collect, classify and summarize
financial information.

35.A review engagement differs in scope as compared to an audit due to

a. The subject matter of the service.
b. The quantity and type of evidence obtained.
c. Ethical requirements with respects to independence.
d. The users of the financial statements.
 College of Accounting Education
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)300-1496
Phone No.: (082)227-5456 Local 137

GENERAL REVIEW 2 L. EDDIE I. AGUILAR, MBA, CPA

Problem 1
In line with your audit of Joed Corporation’s investment account as of December 31, 2014, you ascertained
the following information:

Investment Type CV per book

Investment in bonds 4,000,000
Investment in stocks 6,200,000
Investment in property 3,500,000

Audit notes:

a. Investment in bonds which shall mature on December 31, 2016 were acquired in January 1, 2013
when the prevailing market rate of interest wat at 10%. Interest at 12% is collectible from the bonds
every December 31. The acquisition was recorded by the client as a debit to investment in bonds at
face value with the difference between the face value and the total consideration given up to interest
income. Interest collected in 2013 and 2014 were appropriately recorded. No other entry relating to
the investment was made by the client. Further investigation revealed that the company business
model with regard debt security investment has an objective of collecting contractual cash flows. The
prevailing market rate of interest was at 11% and 9% at the end of 2013 and 2014, respectively.

b. The investment in stock is for 40,000 shares of Princess EJ Corporation’s ordinary shares acquired in
September 30, 2013. The shares were originally acquired at P145 per share. The book value of the
net assets of Princess EJ on this date was at P25 million and its total outstanding shares was at
200,000. Princess EJ’s depreciable assets with average remaining life of 10 years were understated
on this date.

The fair value of Princess EJ’s shares were at P155 per share at the end of 2013. The company
recorded the remeasurement (from acquisition cost to fair value) of the investment at the end of 2013
and recognized the same as unrealized holding gain in the 2014 profit/loss. The only other entry made
by the client related to the investment was the receipt of P2 per share dividend by the end of 2013
and P4 per share dividend in 2014 as dividend income.

Further investigation revealed the following relevant information:

Princess EJ
2013 2014
Net income for the year 3,800,000 5,200,000
Foreign exchange loss – OCI 400,000
Unrealized holding gain – OCI 300,000
Fair value P155 per share P169 per share

c. The investment property was a building factory converted on June 30, 2014 as a property for lease
since the company decided to discontinue its production segment. The factory was originally acquired
at P5 million on January 1, 2011 and was depreciated using straight-line method over a 10 year useful
life. The company elected to use the fair value model in measuring the investment property. The fair
value of the building on June 30, 2014 was at P3.6 million. On December 31, 2014, the fair value of
the building is at P3.2 million.

Questions:
1. What is the correct initial cost of the investment in bonds?
a. P 4,138,843 b. P 4,198,948 c. P 4,211,093 d. P 4,253,589

2. What is the correct carrying value of the investment in bonds as of December 31, 2014?
a. P 4,068,501 b. P 4,138,843 c. P 4,198,948 d. P 4,211,093

3. What is the correct carrying value of the investment in stocks as of December 31, 2014?
a. P 6,670,000 b. P 6,760,000 c. P 6,770,000 d. P 7,180,000

4. What is the retroactive adjustment to the retained earnings, beginning, as a result of your audit of
investment in stocks?
a. P 90,000 b. P 310,000 c. P 400,000 d. P 490,000

5. How much should be recognized in the statement of comprehensive income upon the reclassification
of the building from property, plant, and equipment to investment property?
a. None b. P 100,000 c. P 350,000 d. P 400,000

Problem 2
Your firm is currently conducting the audit of EVERLASTING COMPANY’s financial statements for the year
ended May 31, 2016. you are now concentrating on the review of the working papers prepares by your
staff where possible adjusting journal entries may be drafted to arrive at the adjusted balances of the
accounts that may be affected.

Working Paper no. 1

CASH - BPI
May 31, 2016
Balance per bank statement P7,823,170
Add (deduct) reconciling items:
Deposit in transit (note 1) 93,812
Outstanding check (Note 2) (108, 832)
Note charges by the bank (Note 3) 41,850
Fund transfer from PNB (12,500)
Balance per general ledger P7, 837,500

The top schedule for Cash showed the following accounts with their unadjusted balances:

Cash – BPI P7, 837,500

Cash – PNB 112,500
Cash – SB 187,500
Total P8, 137, 500

Audit Notes:

1. Inclusive of a customer’s check in the amount of P18,750 dated April 25, 2016, which up to now is not
yet deposited because it has been misplaced.
2. Includes two checks totaling P14,354 which were among the items counted during the cash count
conducted early morning of June 1, 2016
3. This is the maturity value of a two-year note maturing on May 31, 2016. The note bears interest of
12%. Interest for the year ended May 31, 2015 was properly accrued.
4. Upon cross-referencing this with the working paper showing the bank reconciliation with PNB,
whereby the bank balance was reconciled with the general ledger balance, you verified that the
P12,500 was appropriately shown as an addition to the bank balance.

Working Paper No. 2

ACCOUNTS RECEIVABLE
Reconciliation between Subsidiary Ledger and General Ledger Balances
May 31. 2016
 Balance per subsidiary ledger P4,023,527
Add (deduct) reconciling items:
Write-offs (See Working Paper No.3) (187,608)
Sales (note 5) 61,250
Collections (Note 6) 36,845
Balance per general ledger P3,934,014

The Company maintains a credit term of n/30

Audit Notes:

5. The goods were in transit as at May 31, 2016, terms FOB shipping point. The company recognizes a
gross profit of 25% on this sale.
6. This was collected from a customer by the company’s branch on May 31, 2016, on sales made on
March 25, 2016, and was remitted to the company on June 15, 2016. Collections from branches are
charged to Cash – SB account.

Working Paper No.3

ALLOWANCE FOR BAD DEBTS
May 31, 2016
Balance, June 1, 2015 P407,500
Add (deduct) transactions during the year:
Write-offs of accounts aged 5 years (187, 608)
Bad debt provision for the year 108,930
Balance, May 31. 2016 P328,822

Based on the company’s past experience, an allowance should be set up based on the following rates:

Aging Distribution Per Subsidiary Ledger Percentage

Current P868,845 2
Pat due:
1 – 30 808,670 5
31 – 60 718,853 10
61 – 90 737,225 15
Over 90 889,934 20
Total P4,023,527

Based on the preceding information, determine the adjusted balances of the following:

6. Cash in Banks
A. P8,128,099 B. P8,165,599 C. P8,091,254 D. P8,140,599

7. Accounts receivable
A. P3,854,669 B. P3,482,039 C. P3,879,074 D. P3,878,419

8. Allowance for bad debts

A. P378,285 B. P605,612 C. P 793,220 D. P328,822

9. The principal amount of the 12% two-year note payable

A. P37,800 B. P41,850 C. P33,750 D. P1,850

10.Cash in bank- BPI

A. P7,778,754 B. P7,803,754 C. P7,788,734 D. P7,812,546

Problem 3
During your first audit of the Charmaine Corporation for the year ended December 31, 2019, you gathered
the following evidence and data relative to your audit of Bonds Payable and related accounts.
Charmaine Corp. is authorized to issue 2,000 bonds, with par value of P1,000 each. Bonds are dated May
1, 2016, and due May 1, 2026. Interest at 12% per annum is due semiannually on May 1 and November
1.

The December 31, 2018, balance of P950,000 represents proceeds from issue of 1,000 bonds on
November 1, 2017.

From the client’s ledger:

Bonds Payable
12/31/18 Balance 950,000
07/01/19 CR 210,000

Interest Expense
06/01/19 CV-120 60,000 07/01/19 CR 4,000
11/01/19 CV-531 72,000

From supporting documents:

CR Cash receipts entry for issuance of 200 bonds at 105 on July 1, 2019. Trustee’s remittance
statement attached.

Entry per client: Cash 214,000

Bonds Payable 210,000
Interest Expense 4,000

CV-120 Cash payment of trustee for interest, November 1, 2008 through May 1, 2019. Paid check to
trustee attached.

CV-531 Cash payment to trustee for interest, May 1, 2009 through November 1, 2019. Paid check to
trustee attached.

Questions:
1. The balance in the Bonds Payable account at December 31, 2019 should be
a. P 1,150,000 b. P 1,160,000 c. P 1,200,000 d. P 1,227,990

2. The balance in the Bond Discount account at December 31, 2019 should be
a. P 37,255 b. P 39,167 c. P 43,137 d. P 50,000

3. The balance in the Bond Premium account at December 2019 should be

a. P 9,268 b. P 9,390 c. P 10,000 d. P 12,976

4. The accrued interest on bonds at December 31, 2019 should be

a. P 12,000 b. P 20,000 c. P 24,000 d. P 72,000

5. The total bonds interest expense for 2019 should be

a. P 126,850 b. P 137,150 c. P 144,013 d. P 149,150

Problem 4
The HVR Company included the following in its notes receivable as of December 31,2016?

Note receivable from sale of land P2,640,000

Note receivable from consultation 3,600,000
Note receivable from sale of equipment 4,800,000

The following transaction during 2016 and other information relate to the company’s notes receivable:

a) On January 1, 2016, HVR Company sold a tract of land to Triple X Company. The land, purchased 10
years ago, was carries on HVR’s books at P1,500,000. HVR received a noninterest-bearing note for
 P2,640 000 from Triple X. The note is due on December 31, 2017. There was no established exchange
price for the land. The prevailing interest rate for this note on January 1, 2016 was 10%.

b) On January 1, 2016, HVR Company received a 5%, P3,600,000 promissory note in exchange for the
consultation services rendered. The note will mature on December 31, 2018, with interest receivable
every December 31. The fair value of the services rendered is not readily determinable, the prevailing
rate of interest for a note of this type was 10% on January 1, 2016.

c) On January 1, 2016, HVR Company sold an old equipment with a carrying amount of P4,800,000
receiving P7,200,000 note. The note bears an interest rate of 4 % and is to be repaid in 3 annual
installments of P2,400,000 (plus interest on the outstanding balance). HVR received the first payment
on December 31, 2016. There is no established market value for the equipment. The market interest
rate for similar notes was 14% on January 1, 2016.

Note: Round off present value factors to four decimal places and final answers to the nearest hundred.

1. What amount of consultation fee revenue should be recognized in 2016?

a. P3,600,000 B. P2,705,000 C. P4,047,500 D. P3,152,500

2. What amount should be reported as gain on sale of equipment?

A. P994,800 B. P2,400,000 C. P1,162,700 D. P1,237,300

3. The amount to be reported as noncurrent notes receivable on December 31, 2016? Is

A. P7,482,200 B. P6,037,300 C. P5,477,500 D. P7,877,600

4. The amount to be reported as current notes receivable on December 31, 2016, is

A. P4,800,000 B. P2,400,200 C. P4,404,900 D. P7,440,000

5. How much interest income should be recognized in 2016?

B. P974,200 B. P756,000 C. P1,378,700 D. P1,160,500

Audit Theory

1. How are management’s responsibility and the author’s responsibility represented in the standard
auditor’s report?
Management’s Auditor’s
responsibility responsibility
a. Implicitly Explicitly
b. Explicitly Implicitly
c. Explicitly Explicitly
d. Implicitly Implicitly

2. When an auditor has a question concerning a client’s ability to continue as a going concern, the auditor
considers management’s plans for dealing with the situation. That consideration is most likely to
include consideration of management’s plans to
a. Decrease ownership equity.
b. Dispose of assets.
c. Increase expenditures on key products.
d. Invest in derivative securities.

3. During an engagement to review the financial statements of an entity, an accountant becomes aware
that several leases that should be capitalized are not capitalized. The accountant considers these leases
to be material to the financial statements. The accountant decides to modify the standard review
report because management will not capitalize the leases. Under these circumstances, the accountant
should
a. Issue an adverse opinion because of the departure from PFRS.
b. Express no assurance of any kind of the entity’s financial statements.
 c. Emphasize that the financial statements are for limited use only.
d. Disclose the departure from PFRS in a separate paragraph of the accountant’s report.

4. A practitioner may perform an agreed-upon procedures engagement on prospective financial

statements provided that which of the following is met?
a. Use of the agreed-upon procedures.
b. The practitioner sets the criteria to be used in the determination of findings.
c. The client agrees that the practitioner will decide appropriate procedures to be performed.
d. The prospective financial statements include a summary of significant assumptions.

5. Which of the following would cause an auditor of an entity’s financial statements to issue either a
qualified opinion or a disclaimer of opinion?
a. Scope limitation involving a recorded uncertainty.
b. Inadequate disclosure of an uncertainty.
c. The use of inappropriate accounting principle.
d. Unreasonable accounting estimate.

6. If interim substantive procedures for an account identified has no exceptions, which of the following
would the auditor not perform on that account at year-end?
a. Tests of details for the entire year under audit.
b. Tests of details of activity during the period since the interim testing date.
c. Reconciliation of year-end balances to interim balances.
d. Substantive analytical procedures of the period since the interim testing date.

7. A client is presenting comparative (two-year) financial statements. Which of the following is correct
concerning reporting responsibilities of a continuing auditor?
a. The auditor should issue one audit report that is on both presented years.
b. The auditor should issue two audit reports, one on each year.
c. The auditor should issue one audit report, but only on the most recent year.
d. The auditor should issue either one audit report on both presented years, or two audit reports, one
on each year.

8. Which of the following procedures would an accountant least likely perform during an engagement to
review the financial statements of an entity?
a. Observing the safeguards over access to and use of assets and records.
b. Comparing the financial statements with anticipated results in budgets and forecasts.
c. Inquiring of management about actions taken at the board of directors’ meetings.
d. Studying the relationships of financial statement elements expected to conform to predictable
patterns.

9. An examination of a financial forecast is a professional service that involves

a. Compiling or assembling a financial forecast that is based on management’s assumptions.
b. Limiting the distribution of the accountant’s report to management and the board of directors.
c. Assuming responsibility to update management on key events for one year after the report’s
date.
d. Evaluating the preparation of a financial forecast and the support underlying management’s
assumptions.

10.Which of the following statement is correct regarding an accountant’s working papers?

a. The accountant owns the working papers and generally may disclose them as the accountant sees
it.
b. The client owns the working papers but the accountant has custody of them until the accountant’s
bill is paid in full.
c. The accountant owns the working papers but generally may not disclose them without the client’s
consent or a court order.
 d. The client owns the working papers but, in the absence of the accountant’s consent, may not
disclose them without a court order.

11.If an audit firm discovers threats to independence with respect to an audit engagement, the Code of
Ethics indicates that the firm should
a. Immediately resign from the engagement.
b. Notify the appropriate regulatory body.
c. Document the issue.
d. Evaluate the significance of the threats and apply appropriate safeguards to reduce them to an
acceptable level.

12.Which of the following would an auditor most likely use in determining the auditor’s preliminary
judgment about materiality?
a. The results of the initial assessment of contr9ol risk.
b. The anticipated sample size for planned substantive tests.
c. The entity’s financial statements of the prior year.
d. The assertions that are embodied in the financial statements.

13.Which of the following is correct concerning requirements about auditor communications about
fraud?
a. Fraud that involves senior management should be reported directly to the audit committee
regardless of the amount involved.
b. Fraud with a material effect on the financial statements should be reported directly by the auditor
to the Securities and Exchange Commission.
c. Fraud with a material effect on financial statements should ordinarily be disclosed by the auditor
through use of n “emphasis of a matter” paragraph added to the audit report.
d. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

14.Assessing control risk at a low level most likely would involve

a. Performing more extensive substantive tests with larger sample sizes than originally planned.
b. Reducing inherent risk for most of the assertions relevant to significant account balances.
c. Changing the timing of substantive tests by omitting interim-date testing and performing the tests
at year-end.
d. Identifying specific controls relevant to specific assertions.

15.Which of the following is a general principle relating to the reliability of audit evidence?
a. Audit evidence obtained from indirect sources rather than directly is more reliable than evidence
obtained directly the auditor.
b. Audit evidence provided by copies is more reliable than that provided by facsimiles.
c. Audit evidence obtained from knowledgeable independent sources outside the client company is
more reliable than audit evidence obtained from nonindependent sources.
d. Audit evidence provided by original documents is more reliable than audit evidence generated
through a system of effective controls.

16.A client decides not to make an auditor’s proposed adjustments that collectively are not material, and
wants the auditor to issue the report based on the unadjusted numbers. Which of the following
statement is correct regarding the financial statement presentation?
a. The financial statements do not conform with PFRS.
b. The financial statements contain unadjusted misstatements that should result in a qualified
opinion.
c. The financial statements are free from material misstatement, but disclosure of the proposed
adjustments is required in the notes to the financial statements.
d. The financial statements are free from material misstatement, and no disclosure is required in the
notes to the financial statements.

17.Indicate which changes would require an emphasis of matter paragraph in the audit report.
The CPA concludes there is substantial The CPA makes reference to the work of an
Doubt about the entity’s ability to expert to indicate shared responsibility in
Continue as a going concern an unmodified opinion
a. Yes Yes
b. No Yes
c. Yes No
d. No No

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

19.Which of the following statement regarding analytical procedures is not correct?

a. Analytical test emphasize a comparison of client internal controls to PFRS.
b. Analytical procedures are required on all audits.
c. Analytical procedure can be used as substantive test.
d. For certain accounts with small balances, analytical procedure alone may be sufficient evidence.

20.If the statement of the financial position of a company is dated December 31, 2016, the audit report is
dated February 18, 2017, and both are released on February 25, 2017, this indicates that the auditor
has searched for subsequent events that occurred up to:
a. December 31, 2016
b. January 1, 2017
c. February 18, 2017
d. February 25, 2017

21.If requested to perform a review engagement for an entity in which an accountant has an immaterial
direct financial interest, the accountant is
a. Not independent and, therefore, may issue a review report, but may not issue an auditor’s report.
b. Not independent and, therefore, may not be associated with the entity’s financial statements.
c. Not independent and, therefore, may not issue as a review report.
d. Independent because the financial interest is immaterial and, therefore, may issue a review
report.

22.In which circumstance will the auditor not consider the need to modify the report?
a. The client’s legal counsel is requested to advise whether a material act is legal or illegal but
refuses to do so.
b. The auditor concludes that the effect of an illegal act creates substantial doubt about the entity’s
ability to continue as a going concern.
c. The auditor concludes that the effect of an illegal act, taken alone or with similar acts, is material
in amount and has not been properly accounted for or disclosed in the financial statements.
d. All of the circumstances require modification of the auditor’s report.

23.Audit documentation should possess certain characteristics. Which of the following is one of the
characteristics?
Audit documentation should be indexed Audit documentation should be organized
and cross-referenced to benefit the client’s staff
a. Yes Yes
b. No No
c. Yes No
d. No Yes
24.Which of the following statement is not correct?
a. It is possible to vary the sample size from one unit to 100% of the items in the population.
b. The decision of how many items to test must be made by the auditor for each audit procedure.
c. The decision of how many items to test should not be influenced by the increased costs of
performing the additional tests.
d. The sample for any given procedure is likely to vary from audit to audit.

25.The following are the benefits claimed for the practice of determining materiality in the initial planning
stage of starting an audit, except
a. Avoiding the problem of doing too little work (under auditing).
b. Avoiding the problem of doing more work than necessary (over auditing).
c. Being able to decide early what kind of audit opinion to express.
d. Being able to fine tune the audit work for effectiveness and efficiency.

26.During the year, the research staff of Buni Co. devoted its entire efforts toward developing a skin
cancer ointment. All costs that could be attributed directly to the project were accounted for as
deferred charges and classified on the statement of financial position as an asset. If the amounts
involved are material, the auditor should
a. Express an unmodified opinion with an emphasis of matter paragraph explaining the uncertainty
of cost recovery.
b. Disclaim an opinion.
c. Express an adverse opinion.
d. Express an unmodified opinion provided that the uncertainty about ultimate realization of the
differed charges is disclosed in the notes.

27.When discussing control risk and the audit risk model, which one of the following statements is false?
a. The relationship between control risk and evidence is direct.
b. If the auditor concludes that an internal control system is completely ineffective to prevent or
detect errors, he/she would assign a 0% to control risk.
c. The relationship between control risk and detection risk is inverse.
d. Control risk is a measure of the auditor’s assessment of the likelihood that errors will not be
prevented or detected by the client’s internal control system.

28.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.

29.A CPA started to audit the financial statements of an entity. After completing certain audit procedures,
the client requested the CPA to change the engagement to a review because of a scope limitation. The
CPA concludes that there is a reasonable justification for the change. Under these circumstances, the
CPA’s review report should include a
a. Statement that a review is substantially less in scope than an audit.
b. Reference to the scope limitation that caused the changed engagement.
c. Description of the auditing procedures that were completed before the engagement was
changed.
d. Reference to the CPA’s justification for agreeing to change the engagement.

30.An auditor expressed a qualified opinion on the prior year’s financial statements because of a lack
adequate disclosure. These financial statements are properly restated in the current year and
presented in comparative form with the current year’s financial statements. The auditor’s updated
report on the prior year’s financial statements should
a. Be accompanied by the auditor’s original report on the prior year’s financial statements.
b. Continue to express a qualified opinion on the prior year’s financial statements.
c. Make no reference to the type of opinion expressed on the prior year’s financial statements.
 d. Express an unmodified opinion on the restated financial statements of the prior year.

31.Under the Code of Ethics, independence is most likely impaired when

a. An immediate family member of a member of the audit team is a director of the client.
b. The firm purchases the goods and services from the client.
c. The firm prepares a client’s tax returns.
d. The firm and the client have an insignificant business relationship involving an immaterial financial
interest.

32.The Code of Ethics for Professional Accountants in the Philippines provides the categories of threats
that could compromise or could be perceived to compromise a professional accountant’s compliance
with the fundamental principles. The threat that the professional accountant will not appropriately
evaluate the results of a previous judgment made or service performed on which the accountant will
rely when forming a judgment as part of providing a current service is called
a. Advocacy threat.
b. Familiarity threat.
c. Self-review threat.
d. Intimidation threat.

33.Which of the following fundamental ethical principles prohibits association of professional accountants
with reports, returns, communications or other information that is believed to contain a materially
false or misleading statement?
a. Integrity
b. Objectivity
c. Professional competence and due care
d. Confidentiality

34.Ariel, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial
data supplied by Modesta Co. regarding Modesta’s written assertion about its compliance with
contractual requirements to pay royalties. Ariel’s report on these agreed-upon procedures should
contain a (an)
a. Disclaimer of opinion about the fair presentation of Modesta’s financial statements.
b. List of the procedures performed and Ariel’s findings.
c. Opinion about the effectiveness of Modesta’s internal control activities concerning royalty
payments.
d. Acknowledgement that the sufficiency of the procedures is solely Ariel’s responsibility.

35.Which of the following matters is an auditor required to communicate to those charged with
governance?
a. Adjustments that were suggested by the auditor and recorded by management that have a
significant effect on the entity’s financial reporting process.
b. The auditor’s consideration of risk factors in assessing the risk of material misstatement arising from
the misappropriation of assets.
c. The results of the auditor’s analytical procedures performed in the review stage of the engagement
that indicates significant variances from expected amounts.
d. Changes in the auditor’s preliminary judgment about materiality that were caused by projecting
the results of statistical sampling for tests of transactions.