UNIT B - REVIEW QUESTIONS

A. Answer the following questions

1. Explain risk-based audit and describe the stages in a risk based audit process.

2. Discuss the risk-based audit model, describe its components and the relationship among
these components.

3. What is materiality? How is it related to audit risk?

4. What is an engagement letter? Why is its use recommended prior to the rendering of
service by a professional CPA?

5. Explain the importance of audit planning.

B. Multiple choice questions – audit risk:

1. The audit risk model is used primarily:

A. For planning purposes in determining how much evidence to accumulate.
B. While doing test of controls.
C. To determine the type of opinion to express.
D. To evaluate the evidence which has been gathered?

2. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are
A. Elements of audit risk while detection risk is not.
B. Changed at the auditor’s discretion while detection risk is not.
C. Considered at the individual account- balance level while detection risk is not.
D. Functions of the client and its environment while detection risk is not.

3. Which of following is an incorrect statement?

A. Detection risk is a function of effectiveness of an auditing procedure and its application.
B. Detection risk arises partly from uncertainties that exist when the auditor does not examine
100 percent of the population.
C. Detection risk arises partly because of other uncertainties that exist even if the auditor were
to examine 100 percent of the population.
D. Detection risks exist independently of the audit of the financial statements.

4. The acceptable level of detection risk (ADR) and the combined level of inherent risk (IR) and
control risk (CR) _____________ related.
A. Directly B. Inversely C. Proportionately D. Not

5. The audit risk model consists of: AR = IR x CR x DR. The detection risk is the dependent variable.
What is the acceptable level of detection risk if the assessed level of inherent risk is HIGH and the
control risk is MEDIUM?
A. Lowest B. Lower C. Medium D. Higher

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6. Which of the following is not a consideration when the auditor is attempting to assess the inherent
risk?
A. Nature of the client’s business.
B. Existence of related parties.
C. Frequency and intensity of top management review.
D. Susceptibility to defalcation

7. Which of the following factors is not a good indicator of potential financial failure?
A. Client is constantly short of cash and working capital
B. Client’s retained earnings were reduced by half as a result of a large dividend payout.
C. Client relies heavily on short-term debt financing for permanent assets.
D. Client has had increasing net losses for several years.

8. Inherent risk is reduced when the likelihood of defalcations is low. This would be true for an
account such as:
A. Property, Plant and equipment C. Cash
B. Held for trading securities D. Accounts receivable.

9. When the auditor assesses inherent risk, he considers among others the following factors, except:
A. Integrity of management. C. Unusual pressures on Management
B. Nature f the entity’s business D. Results of interim tests.

10. After obtaining a sufficient understanding of internal control, the auditor:

A. Assesses the need to apply GAAS.
B. Determines the preliminary assessment of control risk.
C. Assesses detection risk to determine the acceptable level of inherent risk.
D. Determine the assessed levels of detection risk and inherent risk.

11. The ultimate purpose of assessing control risk to contribute to the auditor’s evaluation of the risk
that:
A. Tests of control may fail to identify controls relevant to assertions.
B. Materials misstatements may exist in the financial statements.
C. Specified controls requiring segregation of duties may be circumvented by collusion.
D. Entity policies may be circumvented by senior management.

12. What are the different levels of risk assessment?

A. “High” and “Low” C. “Maximum” and “Minimum”
B. “High” and “Less than High” D. “Higher” and “Lower”

13. An auditor’s preliminary control risk assessment is at HIGH level. Which of the following are
possible reasons for this preliminary assessment?
I. Understanding of the entity’s internal control structure

II. Evaluating the effectiveness of the entity’s internal control system would not be efficient.
A. I only B. II only C. Both I and II D. Neither I
and II

14. When control risk is assessed at less than high for all financial statements assertions, an auditor
should document the auditor’s

A B C D

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 a. Understanding of the entity’s internal control structure Yes Yes No Yes
b. Conclusion that control risk is less than high No Yes Yes Yes
c. Basis for the conclusion that control risk is less than high Yes Yes No No

15. Overall response to address the risks of material misstatement at the financial statement level
include:
A. Emphasizing to the adult team the need to maintain professional skepticism in gathering and
evaluating audit evidence.
B. Assigning more experienced staff or those with special skills or using experts.
C. Incorporating additional elements of unpredictability in the selection of further audit
procedures.
D. All of the answers.

16. The risk that the auditor may give an inappropriate opinion when the financial statements are
materially misstated is called
a. Detection risk c. Audit risk
b. Business risk d. Inherent risk

17. There is an inverse relationship that exists between the acceptable level of detection risk and the
a. Risk of failing to discover material misstatements
b. Assurance provided by substantive tests
c. Preliminary judgments about materiality levels
d. Risk of misapplying audit procedures

18. Which of the following statements concerning audit risk and its components is incorrect?
a. Regardless of the assessed levels of inherent and control risks, the auditor should always
perform some substantive procedures for material account balances and classes of
transactions.
b. The higher the assessment of inherent and control risks, the more evidence the auditor should
obtain from the performance of substantive procedures.
c. The assessed level of inherent risk need not be considered in determining the nature, timing,
and extent of substantive procedures required to reduce the audit risk to an acceptably low
level.
d. After obtaining an understanding of the accounting and internal control systems, the auditor
should make a preliminary assessment of control risk, at the assertion level, for each material
account balance or class of transactions.

19. Because the concept of audit risk and materiality are interrelated, they must be considered
together by the auditor. Which of the following statements is correct?
a. The phrase in the auditor’s report “present fairly, in all material respects, in conformity with
generally accepted accounting principles” indicates the auditor’s belief that the financial
statements taken as a whole are not materially misstated.
b. If misstatements are not individually material, but are material when aggregated with either
misstatements, the concept of materiality does not apply
c. Audit risk is the risk that an auditor may unknowingly modify his/her opinion when, in fact,
the financial statements are fairly presented
d. Only material errors cause financial statements to be materially misstated.

20. The statements below describe the interrelationship of audit risk components. Which is false?
a. There is an inverse relationship between detection risk and the combined level of inherent an
control risks.

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 b. When inherent and control risks are high, the acceptable level of detection risk needs to be
low to reduce audit risk to an acceptably low level
c. When inherent and control risks are low, an auditor can accept a higher detection risk and still
reduce audit risk to an acceptably low level
d. The assessed level of inherent and control risks can be sufficiently low to eliminate the need
for the auditor to perform any substantive procedures

21. It is the process designed and effected by those charged with governance, management and other
personnel to provide reasonable assurance about the achievement of the entity’s objectives.
a. Internal auditing c. Business strategy
b. Internal control d. Accounting process

22. In financial statement audit, the auditor is required to obtain an understanding of the entity’s
internal control to assess the risk of material misstatement in the financial statements. The result
of the understanding
a. Bear no relationship to the nature, timing, and extent of further audit procedures to be
performed
b. Must be reported to the stockholders and the SEC
c. Are not reported to client management
d. May be used as the basis for withdrawing from an audit engagement

23. PSA 315 requires the auditor to perform risk assessment procedures at
a. The financial statement level only
b. The assertion level only
c. The financial statement level and assertion level for classes of transactions, account balances
and disclosures
d. Either the financial statement level or assertion level

24. The auditor’s risk assessment procedures should always include the following, except
a. Inquiries of management and of others within the entity
b. Analytical procedures
c. Observation and inspection
d. Substantive test procedures and tests of controls

25. The auditor’s risk assessment procedures

a. By themselves, do not provide sufficient appropriate audit evidence on which to base the
audit opinion
b. Should not consider information obtained from the auditor’s previous experience with the
entity
c. Are designed to detect material misstatement at the assertion level for classes of transactions,
account balances and disclosures
d. Are designed to test the effectiveness of the entity’s controls

26. The auditor should obtain an understanding of the entity’s objectives and strategies, and those
business risks that may result in risks of material misstatement. Which of the following statements
concerning the entity’s business risk is incorrect?
a. Business risk is broader than the risk of material misstatement of the financial statements,
though it includes the latter
b. An understanding of the business risks facing the entity increases the likelihood of identifying
risks of material misstatements
c. The auditor has a responsibility to identify or assess its business risks

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 d. Business risk may arise from the development of new products or services that may fail

27. The risk that an auditor’s substantive procedures will lead to the conclusion that a material
misstatement does not exist in an account balance or transaction class when in fact, such
misstatement does exist is
a. Control risk c. Audit risk
b. Inherent risk d. Detection risk

28. The existence of audit risk is recognized by the statement in the auditor’s report that the
a. Financial statements are prepared fairly, in all material respects in accordance with PFRS
b. Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the FS
c. Auditor obtains reasonable assurance about whether the FS are free of material
misstatements
d. Auditor is responsible for expressing an opinion on the FS, which are management’s
responsibility

29. Which of the following audit risk components may be assessed in quantitative terms?

Inherent Risk Control Risk Detection Risk

a. Yes No Yes
b. Yes Yes Yes
c. No No No
d. NO No Yes

30. Some account balances, such as those for retirement benefits and finance leases, are the results
of complex calculations. The susceptibility to material misstatements in these types of accounts
is referred to as
a. Audit risk c. Inherent risk
b. Detection risk d. Control risk

31. There is an inverse relationship that exists between the acceptable level of detection risk and the
a. Risk of failing to discover material misstatement
b. Assurance provided by substantive tests
c. Preliminary judgments about materiality levels
d. Risk of misapplying audit procedures

32. The statements below describe the interrelationship of audit risk components. Which is false?
a. There is an inverse relationship between detection risk and the combined level of inherent
and control risks
b. When inherent and control risks are high, the acceptable level of detection risk needs to be
low to reduce audit risk to an acceptably low level
c. When inherent and control risks are low, an auditor can accept a higher detection risk and still
reduce audit risk to an acceptably low level
d. The assessed level of inherent and control risks can be sufficiently low to eliminate the need
for the auditor to perform any substantive procedures

33. Generally accepted auditing standards do not require auditors of financial statements to
a. Assess the risk of occurrence of errors and fraud
b. Design audits to provide reasonable assurance of detecting errors and fraud

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 c. Report all findings of errors and fraud to police authorities
d. Understand the nature of errors and fraud

34. It is appropriate and acceptable for an auditor to

a. Assess both inherent and control risk at 100% and achieve an acceptably low audit risk by
performing extensive detection work
b. Assess control risk at zero and perform a minimum of detection work
c. Assess inherent risk at zero and perform a minimum of detection work
d. Decide that audit risk is 40%

35. With respect to the concept of materiality, which of the following statements is correct?
a. Materiality is a matter of professional judgment
b. Materiality is determined by reference to AASC’s guidelines
c. Materiality depends on the nature of a transaction rather than the peso amount of the
transaction
d. Materiality depends only on the peso amount of an item relative to other items in the FS

36. The preliminary judgment about materiality

a. Need not be quantified
b. Can’t be quantified
c. Must be quantified
d. Must be quantified if the auditor believes that it would be misleading the public not to do so

37. When setting a preliminary judgment about materiality

a. More evidence is required for a low peso amount than for a high peso amount
b. Less evidence is required for a low peso amount than for a high peso amount
c. The same amount of evidence is required for either low or high peso amounts
d. There is no relationship between it and the peso amount of evidence needed

38. Which of the following statements is not correct?

a. Normally, the most important base used as the criterion for deciding materiality is total assets
b. Materiality is a relative rather than an absolute concept
c. Qualitative factors as well as quantitative factors affect materiality
d. Given equal peso amounts, irregularities are usually considered more important than errors

39. In allocating materiality, most practitioners choose to allocate

a. The balance sheet accounts because these are fewer
b. The income statement accounts because they are more important
c. Both balance sheet and income statement accounts because there could be errors on either
one
d. All of the financial statements because there could be errors on other statements besides the
income statement and balance sheet

40. The audit risk model is used primarily

a. For planning purposes in determining how much proof to accumulate
b. While doing tests of controls
c. To determine the type of opinion to express
d. To evaluate the evidence which has been gathered

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41. Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit
function. An effective auditor will
a. Recognize that risks exist and deal with those risks in an appropriate manner
b. Take any means available to reduce the risk to the lowest possible level
c. Set the risk level between 5% and 10%
d. Perform the audit procedures first and quantitatively set the risk level before forming an
opinion and writing the report

42. The auditor set acceptable audit risk at 5%, inherent risk at 100% and control risk at 50%, and
determined a planned detection risk of 10%. If control risk had been 80%, planned detection risk
would be
a. 6% c. 5%
b. 16% d. 10%

43. Which of the following discoveries by the auditor would not raise a red flag of increased inherent
risk?
a. Client makes extensive use of notes receivable and notes payable rather than buying and
selling on open account
b. Client is a parent company with a subsidiary
c. Management bonuses are based on a percentage of net income
d. A bond indenture requires current ratio of at least 3:1
44. An auditor must compensate for a weakness in internal control by raising the
a. Extent of substantive tests
b. Extent of tests of controls (compliance tests)
c. Preliminary judgment about audit risk
d. Level of detection risk

45. The audit risk against which the auditor requires reasonable protections is a combination of two
separate risks. The first of these is that material errors will occur in the accounting process by
which the FS are developed and the second is that
a. Those errors that occur will not be detected in the auditor’s examination
b. A company’s system of internal control is not adequate to detect errors and irregularities
c. Management may possess an attribute that lacks integrity
d. Evidential matter is not competent enough for the auditor to form an opinion based on
reasonable assurance

46. Inherent risk is reduced where the likelihood of defalcation is low. This would be true for an
account such as
a. Accounts receivable c. Marketable securities
b. Inventory d. Cash

47. The auditor assesses control risk because it

a. Indicates where inherent risk may be the greatest
b. Affects the level of detection risk the auditor may accept
c. Determines whether sampling risk is sufficiently low
d. Includes the aspects of nonsampling risk that are controllable

48. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are
a. Changed at the auditor’s discretion while detection risk is not
b. Considered at the individual account balance level while detection risk is not
c. Elements of audit risk while detection risk is not

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 d. Functions of the client and its environment while detection risk is not

49. As the acceptable level of detection risk decreases, an auditor may change the
a. Timing of substantive tests by performing them at an interim date rather than at year end
b. Nature of substantive test from a less effective to a more effective procedure
c. Timing of tests of controls by performing them at several dates rather than at one time
d. Assessed level of inherent risk to a higher amount

50. As acceptable level of detection risk decreases, the assurance directly provided from
a. Substantive tests should increase c. Tests of controls should increase
b. Substantive tests should decrease d. Tests of controls should decrease

C. Multiple choice questions – audit planning:

1. Where the client is changing auditors, PSA requires communication between the predecessor and
successor auditors. The burden of initiating the communication rests with:
A. The client. C. The Philippine SEC.
B. The predecessor auditor D. the successor auditor.

2. Before accepting the audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding:
A. Disagreements which the predecessor had with the client concerning auditing and accounting
principles.
B. The predecessor’s evaluation of the matters of continuing accounting significance.
C. The degree of cooperation the predecessor received concerning the inquiry of the client’s legal
counsel.
D. The predecessor’s assessments of inherent risk and judgments about materiality.

3. If the prospective client refuses to permit the predecessor to respond or limit the predecessor’s
response, the successor should:
A. Continue to ask the predecessor auditor on facts that might bear on the integrity of
management.
B. Accept the engagement but only after an equitable increase in the professional fee.
C. Issue a disclaimer of opinion because the limited response of the predecessor auditor
constitutes a significant scope limitation.
D. Inquire as to the reasons and consider the implications in deciding whether to accept the
engagement.

4. If permission from the client to discuss its affairs with the proposed auditor is denied by the client,
the predecessor auditor should:
A. Keep silent of the denial.
B. Disclose the fact that the permission to disclose is denied by the client.
C. Disclose adequately to proposed auditor all noncompliance made by the client.
D. Seek legal advice before responding to the proposed auditor.

5. Reasons for discontinuing clients might include the following, except:

A. Difficulty in working with client personnel.
B. Evidence indicating a client’s management has integrity.
C. Inability to negotiate an acceptable increase in the audit fee.

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 D. Client need for specialized services the current audit firm is unable or unwilling to provide.

6. Engagement letters are widely used in practice for:

A. Audits only. C. Assurance engagements only.
B. Professional engagements of all types. D. Related services only.

7. An engagement letter is prepared with the interest(s) of ________ in mind.

A. The Auditor. C. The public.
B. The client. D. Both the client and the auditor.

8. The engagement letter will do one, some, or all of the following:

A B C D
1. State whether the CPA will perform audit,
review or compilation services. Yes Yes Yes Yes
2. State whether the CPA will perform tax or
management advisory or other services. Yes Yes No Yes
3. State any restriction to be imposed on the
CPA’s work. No Yes Yes Yes
4. Identify deadlines for completing the work. Yes Yes No Yes
5. State the amount and type of work to be
done by client’s personnel in generating
auditor’s work papers. No No Yes Yes
6. State the CPA’s fees for the engagement. Yes Yes No Yes
7. Inform the client that the CPA does not
have responsibility for detecting fraud. No No Yes Yes

9. The primary purpose of the engagement letter is to:

A. Remind management that the primary responsibility for the financial statements rests with
management.
B. Provide a written record of the agreement with the client as to the services to be provided.
C. Provide a starting point for the auditor’s preparation of the preliminary audit program.
D. Satisfy the requirements of the CPA’s liability insurance policy.

10. The following are valid reasons for sending an engagement letter.
A. To confirm the auditor’s appointment.
B. To disclose the objective and scope of the audit
C. To avoid misunderstanding with respect to the engagement
D. To assure the CPA’s compliance to Philippine Standards on Auditing

11. Which of the following is least likely to be included in an audit engagement letter?
A. Identification of specific audit procedures that the auditor needs to undertake.
B. Description of any letters or reports that the auditor expects to submit to the client.
C. A reference to the inherent limitations of an audit that there is an unavoidable risk that some
material misstatements may remain undiscovered.
D. Basis on which fees are computed and any billing arrangements.

12. After preliminary audit arrangements have been made, an engagement confirmation letter should
be sent to the client. The letter usually would not include
A. A reference to the auditor’s responsibility for the detection of errors or irregularities.
B. An estimation of the time to be spent on the audit work by audit staff and management.
C. A statement that management advisory services would be made available upon request.

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 D. A statement that a management letter will be issued outlining comments and suggestions as
to any procedures requiring the client’s attention.

13. When a CPA is the auditor of a parent entity and also the auditor of its subsidiary, branch or
division (component), which of the following situations will there be no need to send a new letter?
A. Who appoints the auditor of the component.
B. Legal requirements.
C. Number of reports to be prepared during the peak
D. Audit season.
E. Whether a separate audit report is to be issued on the component.

14. On recurring audit engagements, the auditor may decide not to send a new engagement letter
each period. In which of the following situations will there be no need to send a new letter?
A. Revisions or special terms of the engagement.
B. Significant change in nature or size of the client’s business.
C. Recent change of middle management and rank and file organizational structure.
D. Indications of misunderstanding of the objective and scope of the audit.

15. The following may lead the client to request for a change in engagement, except:
A. Restrictions on the scope of the engagement.
B. Misunderstanding as to nature of an audit or related service originally requested.
C. Recent changes in rank and file employees.
D. Change in circumstances affecting the need for the service.

16. An auditor who, before the engagement is completed, is requested to change the engagement to
one which provides a lower level of assurance, should:
A. Consider the appropriateness of doing so.
B. Issue a qualified or disclaimer of option.
C. Agree with the client the terms of the new engagement, without any need to assess the reason
for changes in the engagement.
D. Include the reasons for the change in the report of the revised engagement.

17. If a change in the type of engagement from higher to lower level of assurance is reasonably
justified, the report based on the revised engagement:
A. Should qualify the opinion due to scope limitation.
B. Omits reference to the original engagement.
C. Should always refer to any procedures that may have been performed in the original
engagement.
D. Should refer to the original engagement in a separate paragraph preceding the opinion
paragraph.

18. If a change in the type of engagement from higher to lower level of assurance is not justified, the
auditor should:
A. Qualify the report on the original engagement.
B. Continue with the revised engagement, but make explicit reference about the original
engagement.
C. Refuse to agree to management’s request on the change of engagement and continue with
the original engagement.
D. Withdraw from the engagement.

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19. Which of the following actions may be appropriate if the auditor is unable to change of the
engagement and is not permitted to continue the original engagement:
A. Withdraw from the engagement
B. Consider whether there is any obligation to report to other parties (e.g. Board of Directors).
C. Both a and b.
D. Neither a nor b.

20. A client’s insistence that the audited results are reported quickly after the fiscal year end is
concern to auditors because:
A. Many uncertainties inherent in the financial statements cannot be resolved until several
months after the yea- end closing of the books.
B. The financial statements are less reliable because the period covered by the review for
subsequent events is shortened.
C. Many clients have December 31 year ends and it is difficult to complete the audit when many
of the client’s personnel are on holidays.
D. Time pressure created by unrealistic deadlines increases the risk of errors in judgment and ion
the performance of audit procedures.

21. One of the first things that the auditor will do after accepting a new client is:
A. Communicate with the predecessor auditor.
B. Contact the client’s attorney to discover legal obligations.
C. Study the client’s internal control structure.
D. Tour the client’s facilities.

22. S1 Planning is not a discrete phase of an audit, but rather it is a continual and iterative process.
S2 Planning often begins shortly after (or in connection with) the completion of the previous audit
and continues until the finalization of the audit program.
A. True, False B. False, True C. True, True D. False, False

23. The extent of planning will vary according to the following:

A. Size of the audit client.
B. Auditor’s experience with the entity and knowledge of the business.
C. The nature and complexity of the audit engagement.
D. All of these affect the extent of planning.

24. PSA315 requires:

A. Obtaining an understanding of the entity and it’s environment
B. Discussion among engagement team members about the risk of material misstatement in the
financial statements.
C. Identifying and assessing the risks of material misstatement.
D. All of the answers.

25. Risk assessment procedures include the following, except:

A. Inquiries of management C. Observation and Inspection
B. Confirmation of Accounts Receivable. D. Analytical procedures
26. Which of the following statements best describes “inquiry”?
A. Physical examination of tangible assets, or examination of records or documents, whether
internal or external, in paper form, electronic form, or other media.
B. Looking at a process or procedure being performed by others.
C. Seeking information of knowledgeable persons, both financial and non-financial information.

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 D. Evaluating financial information through a study of plausible relationships among both
financial and non- financial data.

27. The auditor’s understanding of the entity and its environment consists an understanding of the
following aspects:
A. Industry, regulatory and other external factors, including the applicable financial reporting
framework
B. Nature of the entity, including the entity’s selection and application of accounting policies
C. Objectives and strategies and the relate business risks that may result in a material
misstatement of the financial statements.
D. All of these

28. An auditor obtains an understanding of the entity and its environment in order to
A. Make constructive suggestions concerning improvements to the client’s internal control.
B. Develop an attitude of professional skepticism concerning management’s financial statement
assertions.
C. Evaluate whether the aggregation of known misstatement cause the financial statements
taken as a whole to be materially misstated.
D. Understand the events and transactions that may have an effect on the client’s financial
statement.

29. A person or firm possessing special skill, knowledge and experience in a particular field excluding
accounting and auditing.
A. Expert. C. Multiskilled personnel
B. Quality control reviewer D. Taxation specialist

30. Experts may be:

A. Contracted by the entity C. Either a and b
B. Contracted by the auditor D. Neither a nor b

31. In which of the following situation would an expert be least likely contracted by a CPA?
A. Application of accounting methods in computing inventory balances.
B. Determination of fair values using specialized statistical techniques.
C. Legal opinions concerning interpretations of engagements, statues and regulations.
D. Valuations of certain types of assets like land and buildings.

32. Which of the following statements is not correct?

A. Materiality is a relatively rather than an absolute concept
B. Normally, the most important base as a criterion for deciding materiality is Net Income.
C. Legal opinions concerning interpretations of engagements, statues and regulations.
D. Valuations of certain types of assets like land and buildings.

33. Religious corp. has a few large accounts receivable that total P1, 000, 000. Pilgrim Corp. has a
large number of small accounts receivable that also total P1, 000, 000. The importance of an error
in any one account is, therefore, greater for Religious Corp. than for Philgrim Corp. This is an
example of the auditor’s concept of:
A. Materiality C. Reasonable assurance
B. Comparative analysis D. Relative risk

34. In considering materiality for planning purpose, an auditor believes that misstatements
aggregating P10, 000 would have a material effect on an entity’s profit and loss, but that

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 misstatements would have to aggregate P20, 000 to materially affect the statement of financial
position. Ordinarily, it would be appropriate to design auditing procedures that would be
expected to detect misstatements that aggregate:
A. P30, 000 B. P20, 000 C. P15, 000 D. P10, 000

35. When the auditors allocate the preliminary judgment about materiality to account balances, the
materiality allocated to any given account balance is referred to as:
A. The error range C. Tolerable misstatement
B. The materiality D. Tolerable materiality

36. In allocating materiality, most practitioners choose to allocate to:

A. Balance sheet accounts C. Other comprehensive income accounts
B. Income statement accounts D. Equity accounts

37. Regardless f how the allocation of the preliminary judgment about materiality was done, when
the audit is complete the auditor must be confident that the combined errors in all accounts are
A. Less than the preliminary judgment.
B. Equal to the preliminary judgment.
C. More than the preliminary judgment.
D. Less than or equal to the preliminary judgment.

38. The relationship between materiality and audit risk is:

A. Direct. B. Inverse. C. Indeterminable D. None of these

39. When setting a preliminary judgment about materiality,

A. More evidence is required for a low peso amount than for a high peso amount.
B. Less evidence is required for a low peso amount than for a high peso amount.
C. The same amount of evidence is required for either low or high peso amounts.
D. There is no relationship between it and the peso amount of evidence needed.

40. These are events or conditions that provide an opportunity, a motive or a means to commit fraud,
or indicate that fraud may already have occurred.
A. Audit Risk. C. Risk of material misstatement.
B. Fraud risk factors. D. Fraud indications.

41. Which of the following characteristics most likely would heighten and auditor’s concern about the
risk of intentional manipulation of financials?
A. Turnover of senior accounting personnel is low.
B. Insiders recently purchased additional shares of the entity’s stock.
C. Management places substantial emphasis on meeting earnings projections.
D. The rate of change in the entity’s industry is low.

42. This refers to acts of omissions by the entity being audited which are contrary to prevailing laws
or regulations:
A. Fraud B. Error C. Non-compliance D. Misstatements

43. With respect to errors and irregularities, the auditor should plan to
A. Search for errors that would have a material effect and for irregularities that would have
either material or immaterial effect on the financial statements.
B. Search for irregularities that would have a material effect and for errors that would have
either material or immaterial effect on the financial statements.

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 C. Search for errors or irregularities that would have a material effect on the financial
statements.
D. Discover errors or irregularities that have either material or immaterial effect in the financial
statements.

44. S1 An audit cannot be expected to detect noncompliance with all laws and regulations.
S2 Noncompliance does not include personal misconduct of entity management or employers
if they are unrelated to the entity’s business activities.
A. True, false B. False, True C. True, true D. False,
false

45. In connection with the examination of financial statements, an independent auditor could be
responsible for failure to detect a material fraud if:
A. Statistical sampling techniques were not used on the audit engagement.
B. The auditor planned the work in a hasty and efficient manner.
C. Accountants performing important parts of the work failed to discover a close relationship
between the treasurer and the cashier.
D. The fraud was perpetrated by one client employee, who circumvented the existing
internal controls.

46. The auditor should remain alert for evidence of events or conditions which may cast significant
doubt on the entity’s availability to continue as a going concern:
A. During planning and consideration of internal controls
B. During interim audit work
C. During year-end audit work
D. All of the answers.

47. Which one of the following factors is not a good indicator of potential financial failure?
A. Client is constantly short of cash and working capital.
B. Client’s retained earnings were reduced of a large dividend payout.
C. Client relies heavily on debt financing, especially by financing permanent assets with
short-term loans.
D. Client has had increasing net losses for several years.

48. Throughout the course of the audit, the auditor needs to be alert for transactions which appear
unusual in the circumstances and may indicate the existence of previously unidentified related
parties. Examples include the following, except
A. Transactions in which substance differs from form.
B. High volume or significant transactions with certain customers or suppliers as compared
with others.
C. Transactions which have normal terms of trade.
D. Unrecorded transactions, such as the receipt or provision of management services at no
charge.

49. Analytical procedures are required:

A B C D
 As a risk assessment procedure performed
during planning Yes Yes Yes Yes
 As a substantive test procedure during

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 Evidence-gathering Yes Yes No No
 As an overall review at audit completion No Yes No Yes

50. Analytical procedures used in planning should focus on:

A. Evaluating the adequacy of evidence gathered concerning unusual balances.
B. Testing individual account balances that depend on accounting estimates.
C. Enhancing the auditor’s understanding of the client’s business.
D. Identifying material weakness in the control structure.

51. The objective of performing analytical procedures in planning an audit engagement is to identify
the existence of:
A. Unusual transactions and events.
B. Illegal acts that went undetected because of internal control weaknesses
C. Related party transactions that were not properly authorized.

52. The establishment of the overall audit strategy involves:

A. Determine the characteristics of the engagement that defines its scope.
B. Ascertaining the reporting objectives of the engagement to plan the timing of the audit
and the nature of communication required.
C. Considering the important factors that will determine the focus of the engagement team’s
efforts
D. All of the answers.

53. The scope of the audit engagement includes the following, except.
A. The financial reporting framework on which the financial information to be audited has
been prepared, including any need for reconciliations to another financial reporting
framework.
B. The entity’s timetable for reporting, such as interim and final stages.
C. Industry- specific reporting requirements, such as reports mandated by industry
regulators.
D. The expected audit coverage, including the number and locations of components to be
included.

54. The timing of the audit and nature of communications required include the following, except,
A. The organization of meetings with management, and those charged with governance, to
discuss the nature, extent and timing of the audit work.
B. The discussion with management and those charge with governance regarding the
expected type and timing of reports to be issued and other communications.
C. Audit areas where there is a higher risk of material misstatement.
D. The entity’s timetable for reporting, such as interim and final stages

55. With respect to planning an audit, which of the following statements is always true?
A. It is acceptable to perform a portion of the audit of a continuing client at interim dates.
B. An engagement should not be accepted after the client’s year-end.
C. An inventory count must be observed at year-end.
D. Final staffing decisions must be made prior to completion of the planning stage.

56. The element of the audit planning process most likely t be agreed upon with the client before
implementation of the audit strategy is the determination of the
A. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
B. Procedures to be undertaken to discover litigation, claims and assessments.

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 C. Pending legal matters to be included in the inquiry of the client’s attorney.
D. Timing of inventory observation procedures to be performed.

57. In developing the overall audit strategy, the focus of the engagement team’s efforts is considered.
Which of the following is not appropriately classified as a factor affecting the focus of the team’s
efforts?
A. The financial reporting framework on which the financial information to be audited has
been prepared including any need for reconciliations to another financial reporting
framework.
B. Setting materiality for planning purposes.
C. Audit areas where there is a higher risk of material misstatement.
D. Volume of transactions, which may determine whether it is more efficient for the auditor
to rely on internal control.

58. The audit plan should (select the exception)

A. Succeed action C. Be cost-beneficial
B. Be flexible D. Precede performance

59. Which of the following is least likely considered by the auditor in establishing the overall audit
strategy and developing the audit plan?
A. Understanding of the accounting and internal control systems.
B. Risk and materiality
C. The involvement of other auditors in the audit of major subsidiaries.
D. The terms of payment pertaining to other auditors and the respective clients.

60. Which of the following is not considered by the CPA when he makes an overall audit plan?
A. Identification of complex accounting areas including those involving accounting
estimates.
B. The effect of information technology on the audit.
C. The content of the representation letters.
D. The nature and timing of reports and other communication with the entity that are
expected under the engagement.

61. In relation to audit planning, the auditor should document the following:
A. The overall audit strategy
B. The detailed audit plan
C. C. Significant changes made during the audit engagement
D. All of the answer.

62. This is a listing of all the things which the auditor will use to gather sufficient appropriate audit
evidence:
A. Audit procedures. C. Audit program
B. Audit plan D. Audit risk model

63. The auditor should design the written audit program so that:
A. All material transactions will be selected for substantive testing.
B. Substantive test 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 of tests of transaction.

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64. In designing audit programs, an auditor should establish specific audit objectives that related
primarily to the
A. Timing of audit procedures C. Selected audit techniques.
B. Cost-benefit of gathering D. Financial statement assertions.

65. The audit program should set out the:

A. Nature of planned procedures C. Extent of planned procedures
B. Timing of planned procedures D. All of the answer.

66. Cost- benefit considerations are part of audit planning. In relation to this, which of the following
audit procedures is usually the least costly to perform?
A. Test of balances C. Analytical procedures
B. Substantive test of transactions D. Tests of controls.

67. The audit program usually cannot be finalized until the

A. Consideration of the entity’s internal control has been completed.
B. Engagement letter has been communicated to the audit committee
C. Reportable conditions have been communicated to the audit committee.
D. Search for unrecorded liabilities has been performed and documented.

68. The senior auditor responsible for coordinating the field work usually schedules a pre-audit
conference with the audit team primarily to
A. Give guidance to the staff regarding both technical and personnel aspects of the audit.
B. Discuss staff suggestions concerning the establishment and maintenance of time budgets.
C. Establish the need for using the work of specialists and internal auditors.
D. Provide an opportunity to document staff disagreements regarding technical issues.

69. Which of the following procedures is not performed as a part of planning an audit engagement?
A. Reviewing working papers of the prior year . C. Test of controls
B. Performing analytical procedures D. Designing an audit program.

70. Which of the following procedures would an auditor least likely perform in planning a financial
statement audit?
A. Coordinating the assistance of entity personnel in data preparation
B. Discussing matters that may affect the audit with firm personnel responsible for non-audit
services to the entity.
C. Selecting a sample of vendor’s invoices for comparison to receiving reports.
D. Reading the current year’s interim financial statement.

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