L-NU AA-23-02-01-18

LYCEUM-NORTHWESTERN UNIVERSITY
Tapuac District, Dagupan City

COLLEGE OF BUSINESS EDUCATION

MIDTERM EXAMINATION – ACCTG 2 | Auditing and Assurance: Specialized Industries

Name:_____________________________________ Score:____________________

Student No.: _______________ Year/Section:___________ Date of Exam: ____________

1. Means wanton or reckless disregard of the duty of due caro in complying with generally
accepted auditing standards (GAAP).
a. Error
b. Material Information
c. Gross Negligence
d. Audit Engagement Letter

2. The engage,ment partner/parher- partne,r who is responsible for signing the audit roport on the
consolidated financial statements of the audit client, and whree relevant, the individual audit
report of any entity whose financial statements form part of the consolidated financial
statements.
a. Associate
b. Partner
c. Concurring partner
d. Lead partner
3. Error means an unintentional mistake in financial statements such as, except:
a. Mathematical or clerical mistake in the underlying records and accounting data.
b. Oversight or misinterpretation of facts
c. Recording of fransactions without substancs.
d. Misapplicdion of accounting policies
4. Any director, officer, manager or any person occupying a similar status or performing similar
functions in the audit firm including employees performing supervisory role in the auditing
process.
a. Partner
b. Concurring partner
c. Associate
d. Lead partner
5. Information whose omission or misstatement could influence the economic decisions of users.
a. Gross Negligence
b. Risk
c. Error
d. Material Information
6. The team leader of the audit engagement
a. Auditor-in-charge
b. Concurring partner
c. Associate
d. Lead partner
7. Means either the partners of a firm providing audit services or a sole practitioner providing audit
services, as appropriate.
a. Employee
b. External Auditor
c. Auditing Firm
d. Management
8. Means an intentional act by one or more individuals among management, employees, or third
parties, which results in a misrepresentation of financial statements
a. Error
b. Fraud

1|Page
 c. Mistake
d. Negligence
9. The accreditation of an external auditor and/or auditing firm shall expire or it shall be
automatically delisted after a period of
a. three (3) years from date of approval of his accreditation
b. three (3) years from date of submission of his application
c. two (2) years from date of approval of his accreditation
d. five (5) years from date of approval of his accreditation
10. The firm and/or the external auditor shall comply with the following, excludes,
a. International accounting standards(IAS)
b. Terms of its engagement letter and is undertakings, in accordance with the submitted
documents
c. Generally accepted auditing standards (GAAS)
d. Philippine Insurance Institute (PII)
11. Before accepting an audit engagement, a CPA should evaluate whether conditions exist that
raise questions as to the integrity of management. Which of the following conditions most likely
would raise such questions?
a. There are significant differences between the entity's forecasted financial statements and
the financial statements to be audited.
b. The CPA will not be permitted to have access to sensitive information regarding the salaries
of senior management.
c. There have been substantial inventory write-offs just before the year end in each of the past
four years.
d. The CPA becomes aware of the existence of related party transactions while reading the
draft financial statements.
12. Which of the following factors most likely would cause a CPA not to accept a new audit
engagement?
a. Management reputation for failing to provide schedules to prior auditors on a timely basis.
b. The CPA's inability to review the predecessor auditor's working papers.
c. Management's unwillingness to make all financial records available to the CPA.
d. The CPA's lack of understanding of the entity's operations and industry.
13. Which of the following statements would most likely appear in an auditor's engagement letter?
a. Management is responsible for reporting to us any inadequate provisions for the
safeguarding of assets.
b. We will identify internal controls relevant to specific assertions that may prevent or detect
material misstatements.
c. Management agrees to correct all deficiencies in internal control activities identified by us.
d. Management is responsible for making all financial records and related information
available to us
14. Which of the following activities is not an element of a CPA firm's quality control system to be
considered in establishing quality control policies and procedures?
a. Deciding whether to accept or continue a client relationship.
b. Selecting personnel for advancement who have the necessary qualifications.
c. Assessing a client's ability to establish effective internal controls.
d. Monitoring the effectiveness of professional development activities.
15. The purpose of establishing quality control policies and procedures for deciding whether to
accept or continue a client relationship is to
a. Provide reasonable assurance that personnel are adequately trained to fulfill their
responsibilities.
b. Minimize the likelihood of associating with clients whose management lacks integrity.
c. Document the matters that are required to be communicated to the audit committee.
d. Enhance the auditor's understanding of the client's business and its industry
16. Which of the following is an element of a CPA firm's quality control policies and procedures
applicable to the firm's auditing practice?
a. Acceptance of a client relationship.
b. Professional skepticism of management.
c. Computer information processing.
d. Efficiency of organizational structures.
17. Which of the following factors most likely would heighten an auditor's concern about the risk of
fraudulent financial reporting?
a. The audit committee's approval of the initial selection of accounting principles.
b. A lack of competition in the entity's industry, accompanied by increasing profit margins.
c. Management's disclosure of unresolved litigation and contingent liabilities.
d. Year-end adjustments by the entity that significantly affect financial results.

2|Page
18. Responsible for maintaining, monitoring and evaluating the adequacy and effectiveness of the
internal control system on an ongoing basis, and for reporting on the effectiveness of internal
controls on a periodic basis?
a. Internal Auditor
b. Management
c. Audit Committee
d. Convered Institution
19. The objectives of the external auditor are, except:
a. Express that opinion clearly through a written report that also describes the basis for the
opinion.
b. Identify and assess the risks of material misstatement in the Cl's financial statements, taking
into consideration its operations, control environment and its components as well as the Cls
financial reporting systems
c. Oversight on the Cl's disclosure practices
d. Form an opinion on whether the financial statements are prepared, in all material respects,
in accordance with the applicable financial reporting framework based on an evaluation of
the conclusions drawn from the audit evidence obtained
20. The main goal of Insurance Commission is that:
a. Lends credibility to the financial statements of a CI
b. To conduct the audit in accordance with internationally recognized ethical and auditing
standards, including those calling for independence, objectivity, professional competence,
due care and adequate planning and supervision.
c. To protect the policyholders' and planholders' interests and maintain the stability of the
insurance and pre-need industries
d. Adequate governance structures and control processes for areas or exposures that may
pose significant risk to a Cl such as fair value measurement and financial instrument
21. Responsible for providing oversight over the Cl's audit functions
a. Audit Committee
b. Internal Auditor
c. Management
d. External Auditor
22. ln addition to the duties expected of the Audit Committee under lC Circular No. 31-2005, a Cl's
Audit Committee shall, likewise, perform the following functions:
a. Appropriate management information systems are established
b. Adequate governance structures and control processes related to the different activities of
the Cls are established and complied
c. Regularly review and monitor the external auditor's technical competence, independence,
objectivity and overall effectiveness of the external audit process
d. Financial statements are prepared in accordance with accounting standards on the
prescribed financial reporting framework.
23. The external auditor shall evaluate whether, in view of the requirements of the applicable
financial reporting framework
a. The accounting estimates made by management are reasonable
b. Assessment of the adequacy of, and compliance with, the Cl's established policies and
procedures and assurance as to the adequacy, effectiveness and sustainability of the Cl's risk
management and control procedures and infrastructure
c. Responsible for maintaining, monitoring and evaluating the adequacy and effectiveness of
the internal control system on an ongoing basis, and for reporting on the effectiveness of
internal controls on a periodic basis
d. Maintain effective communication channels with the external auditor through regular and
structured dialogues in the course of the external audit
24. The lC is primarily concerned with?
a. Maintenance of a sound system of internal control as a basis for safe and prudent
management of the Cl's business
b. Satisfied that each Cl maintains adequate records prepared consistently in accordance with
applicable international accounting standards and practices to enable it to appraise its
financial condition and the profitability of its business, and that the Cl publishes or makes
available on a regular basis financial statements that fairly reflect its condition.
c. Maintaining the stability of the insurance system and fostering the safety and soundness of
individual Cl in order to protect the interests of the policyholders/planholders

3|Page
 d. Utilizes audits to complement the supervisory process, including its use as an early warning
system for emerging supervisory issues.
25. The external auditor can benefit from the work of the lC such as, choose the best answer?
a. Significant supervisory issues raised by the lC will also aid on the external auditor's
assessment of the financial condition
b. Determining the extent of its audit procedures in ascertaining the carrying value of the
assets and identification and adequate disclosure in the financial statements of all material
commitments and liabilities, and the corresponding capital position of Cls
c. Provision in their audit engagement letters that contents of the lC Reports of Examination
shall be treated appropriately a confidentially
d. Views and judgments on significant transactions, valuation and impairment methodologies,
accounting policies
26. ln determining reasonable fees the following may be considered, except?
a. Complexity of the activities and structure of the company
b. Level of external audit assistance
c. Level of fees being charged by other audit firms
d. Quality of audit services
27. The external auditor should promote a two-way communication with those charged with the
governance of the Cl. The subject of the communication may include
a. Recognizing that circumstances may exist that cause the financial statements to be
materially misstate
b. Assessment of the going concern assumption, particularly in the evaluation of the liquidity
and solvency of the Cl
c. Valuations of financial instruments, including disclosures about the valuation
methodologies, and the extent of off-balance sheet risks to which CIs are expose
d. The responsibilities of the external auditor in relation to the financial statement audit, and
an overview of the planned scope and timing of the audit
28. The auditor uses professional judgment in areas such as, except?
a. Assessing inherent and control risk and the risk of material misstatement due to fraud or
error
b. Deciding upon the nature, timing and extent of the audit planning
c. Evaluating the results of those procedures
d. Assessing the reasonableness of the judgments and estimates made by management in
preparing the financial statements.
29. While the external auditor has the sole responsibility for the audit report and for
determining the nature, timing and extent of audit procedures,he can use the work of the
internal auditor?
a. True
b. False
c. Either True or False
d. Neither True nor False
30. Regulatory requirements which in certain instances influence the accounting principles that a Cl
shall follow, include except?
a. Risk based capital requirements
b. Minimum paid-up capital and networth required of insurance companies
c. Insurance/reinsurance brokers as well as the trust fund reserve requirements for pre-need
companies
d. Adequacy and propriety of disclosures on related party transactions
31. The primary responsibility for establishing and maintaining an internal control rests with
a. The external auditors
b. The internal auditors
c. Management and those charged with governance
d. The controller or the treasurer
32. The fundamental purpose of an internal control is to
a. Safeguard the resources of the organization
b. Provide reasonable assurance that the objectives of the organization are achieved
c. Encourage compliance with organization objectives
d. Ensure the accuracy, reliability and timeliness of information
33. Which of the following is not one of the three primary objectives of effective internal control?
a. Reliability of financial reporting

4|Page
 b. Efficiency and effectiveness of operations
c. Compliance with laws and regulations
d. Assurance of elimination of business risk.
34. Which of the following internal control objectives would be most relevant to the audit?
a. Operational objective
b. Compliance objective
c. Financial reporting objective
d. Administrative control objective
35. An act of two or more employee to steal assets and cover their theft by misstating the
accounting records would be referred to as:
a. Collusion
b. A material weakness
c. A control deficiency
d. A significant deficiency
36. Which of the following is not one of the components of an entity’s internal control?
a. Control risk
b. Control activities
c. Information and communication
d. The control environment
37. The overall attitude and awareness of an entity’s board of director concerning the importance of
the internal control usually is reflected in its
a. Computer-based controls
b. System of segregation of duties
c. Control environment
d. Safeguard over access of assets
38. In evaluating the design of the entity’s internal control environment, the auditor considers the
certain subcomponents of control environment and how they have been incorporated into the
entity’s processes. Subcomponents of control environment would include
a. Integrity and ethical values
b. Commitment to competence
c. Organizational structure
d. Information and communications systems
39. Which of the following components of an entity’s internal control structure includes the
development of employee promotion and training policies?
a. Control activities
b. Control environment
c. Information and communication
d. Quality control system
40. Which of the following subcomponents of the control environment define the existing lines of
responsibility and authority?
a. Organizational structure
b. Management philosophy and operating style
c. Human resource policies and practices
d. Management integrity and ethical values
41. Which of the following is not one of the subcomponents of the control environment?
a. Management philosophy and operating style
b. Organizational structure
c. Adequate separation of duties
d. Commitment to competence
42. Which of the following deal with ongoing or periodic assessment of quality of internal control by
management?
a. Quality control activities
b. Monitoring activities
c. Oversight activities
d. Management activities
43. The policies and procedures that help ensure that management directives are carried out are
referred to as the:
a. Control environment
b. Control activities

5|Page
 c. Monitoring of controls
d. Information systems
44. Which of the following is not one of the specific control activities that are relevant to financial
statement audit?
a. Performance reviews
b. Physical controls
c. Segregation of duties
d. Monitoring
45. Proper segregation of functional responsibilities in an effective structure of internal control calls
for separation of functions of
a. Authorization, execution, and payment
b. Authorization, recording, and custody
c. Custody, execution, and reporting
d. Authorization, payment, and recording
46. Which of the following best describes the purpose of the control activities?
a. The actions, policies and procedures that reflect the overall attitudes of the management
b. The identification and analysis of risks and relevant to the preparation of the financial
statements
c. The policies and procedures that help ensure that necessary actions are taken in order to
achieve the entity’s objectives
d. Activities that deal with the ongoing assessment of the quality of internal control by
management
47. When the auditor attempts to understand the operation of the accounting system by tracing a
few transactions through the accounting system, the auditor is said to be:
a. Tracing
b. Vouching
c. Performing a walk through
d. Testing controls
48. Which of the following is not a medium that can normally be used by an auditor to record
information concerning a client’s internal control policies and procedures?
a. Narrative memorandum
b. Flowchart
c. Procedures manual
d. Questionnaire
49. An auditor uses the knowledge provided by the understanding of internal control and the final
assessed level of control risk primarily to determine the nature, timing and extent of the
a. Attribute tests
b. Tests of controls
c. Compliance tests
d. Substantive tests
50. Based on the requirement of PSA 3330, how frequently must an auditor test operating
effectiveness of controls that appear to functions as they have in past years and on which the
auditor wishes to rely in the current year?
a. Monthly
b. Each audit
c. At least every second audit
d. At least every third audit
51. This involves developing an overall strategy for the expected conduct and scope of the
examination; the nature, extent, and timing of which vary with the size and complexity, and
experience with and knowledge of the entity.
a. Audit planning
b. Audit procedure
c. Audit program
d. Audit working papers
52. Initial planning involves four matters. Which of the following is not one of these?
a. Develop an overall audit strategy

6|Page
 b. Request that bank balances be confirmed
c. Schedule engagement staff and audit specialists
d. Identify the client’s reason for the audit
53. A CPA is conducting the first examination of a client’s financial statements. The CPA hopes to
reduce the audit work by consulting with the predecessor auditor and reviewing the
predecessor’s working papers. This procedure is
a. Acceptable if the client and the predecessor auditor agree to it.
b. Acceptable if the CPA refers in the audit report to reliance upon the predecessor
auditor’s work.
c. Required if the CPA is to render an unmodified opinion.
d. Unacceptable because the CPA should bring an independent viewpoint to a new
engagement.
54. The preliminary judgment about materiality and the amount of audit evidence accumulated are
related.
a. directly
b. indirectly
c. not
d. inversely
55. According to PSA 320, materiality should be considered by the auditor when:
Determining the nature, timing Evaluating the effects
and extent of audit procedures. of misstatements
a. YES YES
b. YES NO
c. NO NO
d. NO YES
56. Which of the following statements is not correct about materiality?
a. The concept of materiality recognizes that some matters are important for fair
presentation of financial statements in conformity with the applicable financial
reporting framework, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate
level of misstatements that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances and necessarily
involve both quantitative and qualitative judgments
d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the
needs of a reasonable person who will rely on the financial statements.
57. “Performance materiality” is the term used to indicate materiality at the:
a. balance sheet level
b. account balance level
c. income statement level
d. company-wide level
58. When comparing level of materiality used for planning purposes and the level of materiality
used for evaluating evidence, one would most likely expect
a. The level of materiality to be always similar.
b. The level of materiality for planning purposes to be similar.
c. The level of materiality for planning purposes to be higher.
d. The level of materiality for planning purposes to be based on total assets while the level
of materiality for evaluating purposes to be based on net income.
59. Qualitative factors can affect an auditor’s assessment of materiality. Which of the following
qualitative factors could influence the assessment of materiality?
I. Misstatements that are otherwise immaterial may be material if affect earnings
trends.
II. Minor misstatements resulting from the consequences of contractual
obligations.
a. I only
b. II only
c. I and II

7|Page
 d. neither I or II
60. Auditors frequently refer to the terms audit assurance, overall assurance, ad level of assurance
to refer to .
a. detection risk
b. audit report risk
c. acceptable audit risk
d. inherent risk
61. The risk that financial statements are likely to be misstated materially without regard to the
effectiveness of internal control is the;
a. Inherent risk
b. Audit risk
c. Client risk
d. Control risk
62. When planning a financial statement audit, the auditor should assess inherent risk at the
Financial statement level Account balance or transaction class level
a. YES YES
b. YES NO
c. NO NO
d. NO YES
63. Which of the following is an incorrect statement?
a. Detection risk cannot be changed at the auditor’s discretion.
b. If individual audit risk remains the same, detection risk bears an inverse relationship to
inherent and control risk.
c. The greater the inherent and control risk the auditor believes exist, the less detection
risk that can be accepted.
d. The auditor might make separate or combines assessments of inherent risk and control
risk.
64. Relationship between control risk and detection risk is ordinarily
a. Parallel
b. Direct
c. Inverse
d. Equal
65. Which of the following is not correct regarding an auditor’s decision that a lower acceptable
audit risk is appropriate?
a. More evidence is accumulated
b. Less evidence is accumulated
c. Special care is required in assigning experienced staff
d. Review of audit documentation is performed by personnel not assigned to the
engagement
66. These consist of the analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationship that are inconsistent with other relevant
information or deviate from predictable amount.
a. Financial statement analysis
b. Variance analysis
c. Analytical procedures
d. Regression analysis
67. Which of the following statements about analytical procedures is incorrect?
a. Analytical procedures are required to be performed in the planning phase of the audit.
b. Analytical procedures are required to be done during the testing phase of the audit.
c. Analytical procedures are required to be done during the completion phase of the audit.
d. Analytical procedures may be performed in the planning, testing and completion phases
of the audit.
68. In developing the overall audit plan and audit program, the auditor should assess inherent
risk at the:
Audit plan Audit program

8|Page
 a. Financial statement level Accounting balance level
b. Account balance level Financial statement level
c. Account balance level Account balance level
d. Financial statement level Financial statement level
69. An auditor should design the written audit program so that
a. All material transactions will be selected for substantive testing
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of
transactions.
70. Which of the following matters would least likely appear in the audit program?
a. Specific procedures that will be performed.
b. Specific audit objectives.
c. Estimated time that will be spent in performing certain procedures.
d. Documentation of the accounting and internal control systems being reviewed.
ajmiranda
------END-----
Good luck and God bless

Reviewed and Checked by:

Dr. Genoveva Y. Reyes, CPA, FRIAcc

9|Page