1.

Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor, the
CPA should
a. Contact the predecessor auditor without advising the prospective client and request a complete report of the
circumstance leading to the termination with the understanding that all information disclosed will be kept confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures to
verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate the
confidential relationship between auditor and client.
d. Advise the client of the intention to contact the predecessor auditor and request permission for the contact.
2. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor
regarding the predecessor’s
a. Opinion of any subsequent events occurring since the predecessor’s audit report was issued.
b. Understanding as to the reasons for the change of auditors.
c. Awareness of the consistency in the application of GAAP between periods.
d. Evaluation of all matters of continuing accounting significance.
3. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding
a. Specialized accounting principles of the client’s industry.
b. The competency of the client’s internal audit staff.
c. The uncertainty inherent in applying sampling procedures.
d. Disagreements with management as to auditing procedures.
4. The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are best documented in
a. Independent auditor’s report b. Client’s representation letter
c. Audit engagement letter d. Audit program
5. Which of the following is least likely included in an audit engagement letter?
a. The objective of financial reporting.
b. Management responsibility for the financial statements.
c. The form of any reports or other communication of the results of the engagement.
d. Arrangement concerning the involvement of other auditors or experts in some aspects of the audit.
6. An audit engagement letter least likely includes
a. A reference to the inherent limitation of an audit that some material misstatements may remain undiscovered.
b. Identification of specific audit procedures that the auditor needs to undertake.
c. Description of any letters or reports that the auditor expects to submit to the client.
d. Arrangements concerning the involvement of internal auditors and other client
7. According to PSA 210, which of the following statements is correct?
a. The auditor and the client need not agree on the terms of the engagement.
b. Where the terms of the engagement are changed, the auditor and the client need not agree on the new terms if they
already agreed on the old terms.
c. The engagement letter assists in the supervision and review of the audit work.
d. The auditor may agree to a change of engagement where there is reasonable justification for doing so.
8. Which of the following actions may be appropriate if the auditor is unable to agree to a change of the engagement and is not
permitted to continue the original engagement
I. Issue a qualified opinion due to a significant scope limitation.
II. Auditor should withdraw from the engagement.
III. Consider whether there is any obligation to report to the board of directors or shareholders the circumstances
necessitating withdrawal
a. I only b. II and III c. I and II d. I, II and III
9. When an independent auditor expresses an unqualified opinion he asserts that:
(1) He performed the audit in accordance with generally accepted auditing standards.
(2) The company is a profitable and viable entity.
(3) The financial statements examined are in conformity with GAAP.
(4) The financial statements are accurate and free of errors.
a. All of the above statements are true. b. Only statements (1) and (3) are true.
c. Only statements (2) and (4) are true. d. All of the above statements are false.
10. If a company’s external auditor expresses an unqualified opinion as a result of the audit of the company’s financial
statements, readers of the audit report can assume that
a. The external auditor found no fraud.
b. The company is financial sound and the financial statements are accurate.
c. Internal control is effective.
 d. All material disagreements between the company and external auditor about the application of accounting
principles were resolved in the satisfaction of the external auditor.
11. Eagle Company’s financial statements contain a departure from generally accepted accounting principles because, due to
unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is
a. Qualified and describe the departure in a separate paragraph.
b. Unqualified but not mention the departure in the auditor’s report.
c. Qualified or adverse, depending on materiality, and describe the departure in a separate paragraph.
d. Unqualified and describe the departure in a separate paragraph.
12. If management fails to provide adequate justification for a change from one generally accepted accounting principle to
another, the auditor should
a. Add an explanatory paragraph and express a qualified or an adverse opinion for lack of conformity with generally
accepted accounting principles.
b. Disclaim an opinion because of uncertainty.
c. Disclose the matter in a separate explanatory paragraph(s) but not modify the opinion paragraph.
d. Neither modify the opinion nor disclose the matter because both principles are generally accepted.
13. Pamela, CPA, was engaged to audit the financial statements of One Co. after its fiscal year had ended. The timing of
Pamela’s appointment as auditor and the start of field work made confirmation of accounts receivable by direct
communication with the debtors ineffective. However, Pamela applied other procedures and was satisfied as to the
reasonableness of the account balances. Pamela’s auditor’s report most likely contained a(n)
a. Unqualified opinion.
b. Unqualified opinion with an explanatory paragraph.
c. Qualified opinion because of a scope limitation.
d. Qualified opinion because of a departure from GAAS.
14. When an auditor expresses an opinion other than unqualified opinion, a clear description of all substantive reasons for the
modification of the opinion should be included in the report. This explanation should be presented:
a. As a separate paragraph that follows the opinion paragraph of the audit report.
b. As a separate paragraph, preferably after the opinion paragraph, of the audit report.
c. In the opinion paragraph
d. As a separate paragraph in the notes to financial statements.
15. What is the purpose of the following paragraph in a particular audit report: “…We draw attention to note X in the financial
statements which discusses that the company incurred a net loss of P6.4 million during the year ended December 31, 2004 and as of that date, the
Company’s liabilities exceeded its total assets by P2,500,000...”
a. A standard reporting requirement.
b. Emphasis of matter about the going concern problems of the entity.
c. Inadequate disclosure qualification.
d. An inappropriate reporting.
16. If subsequent to the issuance of the audited financial statements, the auditor becomes aware of material misstatements in
the financial statements that exist prior to the date of the audit report, the auditor should
a. Notify the parties who currently relying on the financial statements.
b. Discuss the matter with management, and should take the action appropriate in the circumstances.
c. Document such information in the audit plan for succeeding audit.
d. Submit revised copies of the financial statements and audit report to the stockholders.
17. The most common type of audit report contains a(n):
a. Adverse opinion. b. Disclaimer of opinion.
c. Qualified opinion. d. Unqualified
18. An auditor would issue an adverse opinion if
a. The audit was begun by other independent auditors who withdrew from the engagement.
b. The statements taken as a whole do not fairly present the financial condition and results of operations of the
company.
c. A qualified opinion cannot be given because the auditor lacks independence.
d. The restriction on the scope of the audit was significant.
19. Soon after Boyd's audit report was issued, Boyd learned of certain related party transactions that occurred during the year
under audit. These transactions were not disclosed in the notes to the financial statements. Boyd should
a. Plan to audit the transactions during the next engagement.
b. Recall all copies of the audited financial statements.
c. Ask the client to disclose the transactions in subsequent interim statements.
d. Determine whether the lack of disclosure would affect the auditor's report.
20. Because of inadequate records the auditor is uncertain as to whether property and equipment is stated at cost. The auditor
should issue a (n):
a. Qualified opinion b. Adverse opinion
b. Unqualified opinion d. Standard opinion
21. The development of a general strategy and a detailed approach for the expected nature, timing, and extent of audit refers to
a. Supervision b. Audit procedures c. Directing d. Planning
22. The auditor should consider the nature, extent, and timing of the work to be performed and should prepare a written audit
program for every audit. Which audit standard is most closely related to this requirement?
a. The audit is to be performed by a person or persons having adequate technical training and proficiency as an
auditor.
b. In all matters relating to the assignment, an independent mental attitude is to be maintained by the auditor(s).
c. Due professional care is to be exercised in the planning and performance of the audit and preparation of the report.
d. The work is to be adequately planned and assistants, if any, are to be properly supervised.
23. Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?
a. A flowchart or narrative of the information system describing the recording and classification of transactions for
financial reporting.
b. An audit program setting forth in detail the procedures necessary to accomplish the engagement’s objectives.
c. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity
personnel.
d. An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved.
24. Which of the following is an aspect of scheduling and controlling the audit engagement?
a. Including in the audit program a column for estimated and actual time.
b. Performing audit work only after the client’s books of account have been closed for the period under examination.
c. Writing a conclusion in individual working papers indicating how the results of the audit will affect the auditor’s
report.
d. Including in the engagement letter an estimate of the minimum and maximum audit fee
25. Adequate planning of the audit work helps the auditor of accomplishing the following objectives, except:
a. Gathering of all corroborating audit evidence.
b. Ensuring that appropriate attention is devoted to important areas of the audit.
c. Identifying the areas that need a service of an expert.
d. The audit work is completed efficiently.
26. The extent of planning will vary according to any of the following, except:
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. The assessed level of control risk.
27. 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 information technology used by the client.
c. The content of the representation letters.
d. The nature and timing of reports or other communication with the entity that are expected under the engagement..
28. The audit program should contain the following, except:
a. Audit objective b. Time budget for the various audit areas
c. Set of planned audit procedures d. The combined assessed level of inherent and control risk
29. Which of the following will most likely help the auditor to identify and understand the events, transactions and practices of
his audit client?
a. Obtaining a sufficient knowledge of the business of his client.
b. Understanding of accounting and internal control.
c. Testing control policies and procedures.
d. Obtaining a representation letter from the client management.
30. The auditor should have or obtain a knowledge of the client’s business sufficient to:
a. Evaluate whether the financial statements are materially misstated.
b. Document material weaknesses in accounting and internal control systems.
c. Identify and understand events, transactions and practices that may have effect on financial statements.
d. Have an overall evaluation of whether financial assertions are fairly presented in the financial statements.
31. Which of the following may not cast significant doubt about the going concern assumption of an entity.
a. The entity heavily used equity financing for investment in permanent assets.
 b. Non-compliance with capital or other statutory requirements.
c. Pending legal or regulatory proceeding against the entity that may, if successful, result in claims that are unlikely to
be satisfied.
d. Changes in legislation or government policy expected to adversely affect the entity.
32. Which of the following is correct statement?
a. The auditor should use professional judgment to assess audit risk and to design audit procedures to ensure it is
eliminated.
b. The auditor is an insurer, and his or her report constitutes a guarantee.
c. The subsequent discovery that a material misstatement exists in the financial statements is evidence of inadequate
planning, performance, or judgment on the part of the auditor.
d. The auditor should obtain an understanding of the accounting and internal control systems sufficient to plan the
audit and develop an effective audit approach.
33. According to PSA 400 – Risk Assessments and Internal Control, audit risk means
a. The susceptibility of an account balance or class of transactions to misstatement that could be material, individually
or when aggregated with misstatements in other balances or classes, assuming that there were no related internal
controls.
b. The risk that a misstatement, that could occur in an account balance or class of transactions and that could be
material, individually or when aggregated with misstatements in other balances or classes, will not be prevented or
detected and corrected on a timely basis by the accounting and internal control systems.
c. The risk that an auditor’s substantive procedures will not detect a misstatement that exists in an account balance or
class of transactions that could be material, individually or when aggregated with misstatements in other balances or
classes.
d. The risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated.
34. Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor’s discretion.
35. 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.
36. Why would the auditor assess control risk?
a. Because it indicates where inherent risk may be the greatest.
b. Because it determines whether sampling risk is sufficiently low.
c. Because it affects the level of detection risk the auditor may accept.
d. Because it includes the aspects of nonsampling risk that are controllable.
37. The relationship between acceptable level of detection risk and the combined level of inherent and control risk is
a. Direct b. Inverse c. Parallel d. Independent
38. An auditor decides to increase the assessed level of control risk from that originally planned on the basis of audit evidence
gathered and evaluated. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the
auditor would
a. Decrease substantive testing. b. Increase inherent risk.
c. Increase materiality levels. d. Decrease detection risk.
39. As the acceptable level of detection risk decreases, the assurance directly provided from
a. Substantive tests should increase. b. Substantive tests should decrease.
c. Tests of controls should increase. d. Tests of controls should decrease.
40. Which of the following statements is true?
a. If control risk is assessed at maximum, the nature of related substantive tests should be changed from more to less
effective.
b. If control risk is assessed at maximum, the nature of related substantive tests should be changed from less to more
effective.
c. If control risk is assessed at maximum, the timing of related substantive tests should be changed from year-end to
an interim date.
d. If control risk is assessed at maximum, the extent of related substantive tests should be changed from a larger to a
smaller sample.
41. Which statement is incorrect regarding obtaining an understanding of the entity and its environment?
a. Obtaining an understanding of the entity and its environment is an essential aspect of performing an audit in
accordance with PSAs.
b. That understanding establishes a frame of reference within which the auditor plans the audit and exercises
professional judgment about assessing risks of material misstatement of the financial statements and responding to
those risks throughout the audit.
c. The auditor’s primary consideration is whether the understanding that has been obtained is sufficient to assess the
risks of material misstatement of the financial statements and to design and perform further audit procedures.
d. The depth of the overall understanding that is required by the auditor in performing the audit is equal to that
possessed by management in managing the entity.
42. Which statement is incorrect regarding analytical procedures?
a. Analytical procedures may be helpful in identifying the existence of unusual transactions or events, and amounts,
ratios, and trends that might indicate matters that have financial statement and audit implications.
b. In performing analytical procedures as risk assessment procedures, the auditor develops expectations about
plausible relationships that are reasonably expected to exist.
c. When comparison of those expectations with recorded amounts or ratios developed from recorded amounts yields
unusual or unexpected relationships, the auditor considers those results in identifying risks of material misstatement.
d. When such analytical procedures use data aggregated at a high level (which is often the situation), the results of
those analytical procedures provide a clear-cut indication about whether a material misstatement may exist.
43. The following are examples of conditions and events that may indicate the existence of risks of material misstatement,
except
a. Operations in regions that are economically stable. b. Pending litigation and contingent liabilities.
c. Application of new accounting pronouncements. d. Entities or business segments likely to be sold.
44. Which statement is incorrect regarding significant risks that require special audit consideration?
a. The auditor should determine which of the risks identified are, in the auditor’s judgment, risks that require special
audit consideration.
b. The auditor excludes the effect of identified controls related to the risk to determine whether the nature of the risk,
the likely magnitude of the potential misstatement including the possibility that the risk may give rise to multiple
misstatements, and the likelihood of the risk occurring are such that they require special audit consideration.
c. Routine, non-complex transactions that are subject to systematic processing are more likely to give rise to
significant risks because they have higher inherent risks.
d. Significant risks are often derived from business risks that may result in a material misstatement.
45. According to PSA 400, which of the following is correct regarding internal control system?
a. Internal control system refers to all the policies and procedures adopted by the auditor to assist in achieving
management’s objective.
b. A strong environment, by itself, ensure the effectiveness of the internal control system.
c. In the audit of financial statements, the auditor is only concerned with those policies and procedures within the
accounting and internal control systems that are relevant to the financial statements.
d. The internal control system is confined to those matters which relate directly to the functions of the accounting
system.
46. Which of the following best describe the interrelated components of internal control?
a. Organizational structure, management philosophy, and planning.
b. Control environment, risk assessment, control activities, information and communication systems, and monitoring.
c. Risk assessment, backup facilities, responsibility accounting and natural laws.
d. Legal environment of the firm, management philosophy, and organizational structure.
47. In an audit of financial statements, an auditor’s primary consideration regarding a control is whether it
a. Reflects management’s philosophy and operating style.
b. Affects management’s financial statement assertions.
c. Provides adequate safeguards over access to assets.
d. Enhances management’s decision-making processes.
48. Audit evidence concerning segregation of duties ordinarily is best obtained by
a. Performing tests of transactions that corroborate management’s financial statement assertions
b. Observing the employees as they apply specific controls.
c. Obtaining a flowchart of activities performed by available personnel.
d. Developing audit objectives that reduce control risk.
49. An auditor wishes to perform tests of controls on a client’s cash disbursements procedures. If the controls leave no audit
trail of documentary evidence, the auditor most likely will test the procedures by
a. Confirmation and observation. b. Analytical procedures and confirmation.
 c. Observation and inquiry. d. Inquiry and analytical procedures
50. Which of the following would not be a method used to conduct tests of controls?
a. Inquiry b. Walkthrough
c. Confirmation d. Observation
51. The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the extensions.
This is an example of a
a. Test of controls b. Dual purpose test
c. Substantive test d. Test of balances
52. In a small company that doesn't employ an adequate number of employees to permit proper division of responsibilities,
effective internal control can be strengthened by
a. Direct participation by the owner of the business in the record keeping activities of the business.
b. Employment of temporary personnel to aid in the separation of duties.
c. Delegation of full, clear-cut responsibility to each employee for the functions assigned to each.
d. Engaging a CPA to perform monthly "write up" work.
53. Which of the following audit techniques most likely would provide an auditor with the most assurance about the
effectiveness of the operation on an internal control procedure?
a. Confirmation with outside parties c. Recomputation of account balance
b. Observation of client personnel d. Inquiry of client personnel
54. Which of the following is the correct order for performing the auditing procedures A through C below
A = Tests of Controls
B = Preparation of a flowchart depicting the client’s internal control structure
C = Substantive tests
a. ABC b. BAC c. ACB d. BCA
55. After considering a client’s internal control, an auditor has concluded that the system is well designed and is functioning as
anticipated. Under these circumstances, the auditor would most likely
a. Cease to perform further substantive tests
b. Not increase the extent of planned substantive tests
c. Increase the extent of anticipated analytical procedures
d. Perform all tests of controls to the extent outlined in the preplanned audit program
56. After considering internal control, an auditor might decide to
a. Increase the extent of tests of controls and substantive tests in areas where internal control is strong
b. Increase the extent of substantive tests in areas where internal control is weak
c. Reduce the extent of tests of controls in areas where internal control is strong
d. Reduce the extent of both substantive tests and tests of controls in areas where internal control is strong
57. To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all of the
following except:
a. Make inquiries b. Make observations
b. Design substantive tests d. Inspect documents and records
58. Before relying on the system of internal control, the auditor obtains a reasonable degree of assurance that the internal
control procedures are in use and operating as planned. The auditor obtains this assurance by performing planned
a. Substantive tests b. Transaction tests
c. Tests of controls d. Tests of trends and ratios
59. Internal control procedures are not designed to provide reasonable assurance that
a. Transactions are executed in accordance with management's authorization.
b. Access to assets is permitted only in accordance with management's authorization.
c. Irregularities will be eliminated.
d. The recorded accountability for assets is compared with the existing assets at reasonable intervals.
60. Which of the following is not part of the control environment?
a. Management philosophy and operating style.
b. Organizational structure and methods of assigning authority and responsibility.
c. Information and communication systems.
d. The function of the board of directors and its committees.
61. When obtaining an understanding of the accounting and internal control system the auditor may trace a few transactions
through the accounting system. This technique is:
a. Reperformance test b. Walk-through test
c. Test of transactions d. Validity test
62. The evaluation of deviations that were observed upon completing tests of controls
a. May require the need for doing more extensive understanding of control.
 b. May require more extensive tests of controls.
c. Always requires documentation of the basis of assessment of control risk.
d. May require modification of the nature, timing, and extent of planned substantive procedures.
63. Tests of controls may include the following, except:
a. Reperformance of internal control procedures
b. Inquiries about, and observation of, internal controls which leave no audit trail.
c. Inspection of documentary support for transactions evidencing authorization
d. Analytical procedures involving comparison of operating expenses with budgeted amount.
64. The entire set of data about which the auditor wishes to draw conclusions is called
a. Population. b. Sampling frame.
c. Sample. d. Sampling unit.
65. Which of the following constitutes audit sampling?
a. Selecting and examining specific items to determine whether or not a particular procedure is being performed.
b. Examining items to obtain information about matters such as the client’s business, the nature of transactions,
accounting and internal control systems.
c. Examining items whose values exceed a certain amount so as to verify a large proportion of the total amount of an
account balance or class of transactions.
d. Applying audit procedures to less than 100% of items within an account balance or class of transactions such that
all sampling units have a chance of selection.
66. The following situations will likely lead the auditor to use 100% testing, except
a. When the population constitutes a small number of large value items.
b. When both inherent and control risks are high and other means do not provide sufficient appropriate audit
evidence
c. When the repetitive nature of a calculation or other process performed by a computer information system makes a
100% examination cost effective.
d. When testing controls that leave audit trail.
67. Which of the following is true about sampling and non-sampling risks?
a. Sampling risk can be reduced by increasing sample size.
b. Sampling risk cannot be eliminated.
c. Non-sampling risk can be eliminated by proper engagement planning, supervision, and review.
d. Non-sampling risk arises from the possibility that the auditor’s conclusion, based on a sample may be different
from the conclusion reached if the entire population were subjected to the same audit procedure.
68. Each time an auditor draws a conclusion based on evidence from a sample, an additional risk, sampling risk, is introduced.
An example of sampling risk is
a. Projecting the results of sampling beyond the population tested.
b. Properly applying an improper audit procedure to sample data.
c. Improperly applying a proper audit procedure to sample data.
d. Drawing an erroneous conclusion from sample data.
69. Which of the following best illustrates the concept of sampling risk?
a. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
b. An auditor may select audit procedures that are not appropriate to achieve the specific objective.
c. An auditor may fail to recognize errors in the documents examined for the chosen sample.
d. The documents related to the chosen sample may not be available for inspection.
70 A sample in which every possible combination of items in the population has an equal chance of constituting the sample is
a. Representative sample b. Random sample
c. Statistical sample d. Judgment sample
71. Tests of controls provide reasonable assurance that controls are applied as prescribed. A sampling method that is useful
when testing controls is:
a. Nonstatistical sampling b. Discovery sampling
c. Attribute estimation sampling d. Stratified random sampling
74. Since auditors are interested in the occurrence of exceptions in population, they refer to the occurrence as
a. Exception rate b. Deviation rate
c. Population rate d. Confidence level
75. The deviation rate the auditor will permit in the population and still be willing to reduce the assessed level of control risk is
called the
a. Tolerable deviation rate b. Acceptable risk of over-reliance
c. Estimated population deviation rate d. Sample deviation rate
76. For which of the following audit tests would an auditor most likely use attribute sampling?
 a. Making an independent estimate of the amount of a FIFO inventory.
b. Examining invoices in support of the valuation of fixed asset additions.
c. Selecting accounts receivable for confirmation of account balances.
d. Inspecting employee time cards for proper approval by supervisors.
77. If the auditor is concerned that a population may contain exceptions, the determination of a sample size sufficient to
include at least one such exception is a characteristic of
a. Discovery sampling b. random sampling
c. Variable sampling d. PPS
78. At times a sample may indicate that the auditor’s assessed level of control risk for a given control is reasonable when, in
fact, the true compliance rate does not justify the assessed level. This situation illustrates the risk of
a. Assessing control risk too low c. Incorrect precision
b. Assessing control risk too high d. Incorrect rejection
79. As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment
occurred because the true deviation rate in the population was
a. Less than the risk of assessing control risk too low, based on the auditor’s sample.
b. Less than the deviation rate in the auditor’s sample.
c. More than the risk of assessing control risk too low, based on the auditor’s sample.
d. More than the deviation rate in the auditor’s sample.
80. If a selected random number matches the number of a voided voucher, the voucher ordinarily should be replaced by
another voucher in the sample if the voucher
a. Constitutes a deviation b. Cannot be located
b. Has been properly voided d. Represents an immaterial peso amount
81. Assessing control risk too high is the risk that the sample
a. Does not support tolerable error for some or all of management’s assertions.
b. Contains proportionately more deviations from prescribed control procedures than actually exist in the population
as a whole.
c. Contains monetary misstatements that could be material to the financial statements when aggregated with
misstatements in other account balances or classes of transactions.
d. Contains proportionately fewer deviations from prescribed control procedures than actually exist in the population
as a whole.
82. “Whenever a sample is taken, there is a risk that the quantitative conclusions about the population will be incorrect.”
a. This is always true.
b. This is always true unless 100 percent of the population is tested.
c. This is true for statistical sampling, but not for non-statistical sampling.
d. This is true for non-statistical sampling but not for statistical sampling.
83. Accounting records least likely include
a. The records of initial entries and supporting records.
b. The general and subsidiary ledgers.
c. Work sheets and spreadsheets supporting cost allocations.
d. Comparable data about competitors (benchmarking).
85. Which statement is correct regarding the sufficiency and appropriateness of audit evidence?
a. Sufficiency is the measure of the quality of audit evidence.
b. Appropriateness is the measure of the quantity of audit evidence; that is, its relevance and its reliability in providing
support for, or detecting misstatements in, the classes of transactions, account balances, and disclosures and related
assertions.
c. The quantity of audit evidence needed is affected by the risk of misstatement (the greater the risk, the more audit
evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be
required).
d. Merely obtaining more audit evidence may compensate for its poor quality.
86. Which of the following generalizations in assessing the reliability of audit evidence is incorrect?
a. Audit evidence is more reliable when it is obtained from independent sources outside the entity.
b. Audit evidence that is generated internally is not affected by the effectiveness of the controls imposed by the entity.
c. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by
inference.
d. Audit evidence is more reliable when it exists in documentary form.
87. Which statement is incorrect regarding audit evidence?
a. The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which
to base the audit opinion.
 b. Accounting records alone do not provide sufficient audit evidence.
c. The auditor uses professional judgment and exercises professional skepticism in evaluating the quantity and quality
of audit evidence, and thus its sufficiency and appropriateness, to support the audit opinion.
d. The matter of difficulty or expense involved is a valid basis for omitting an audit procedure for which there is no
alternative.
88. The auditor is not always required to perform
a. Risk assessment procedures. b. Substantive procedures.
c. Test of controls. d. Both a and c
89. Observation
a. Consists of looking at a process or procedure being performed by others.
b. Consists of seeking information of knowledgeable persons, both financial and non-financial, throughout the entity
or outside the entity.
c. Is the process of obtaining a representation of information or of an existing condition directly from a third party.
d. Is the auditor’s independent execution of procedures or controls that were originally performed as part of the
entity’s internal control.
90. This consists of checking the mathematical accuracy of documents or records.
a. Reperformance b. Recalculation c. Confirmation d. Inspection
91. Which of the following is the best explanation of the difference, if any, between audit objectives and audit procedures?
a. Audit procedures establish broad general goals, audit objectives specify the detailed work to be performed.
b. Audit objectives are tailor-made for each assignment, audit procedures are generic in application.
c. Audit objectives define specific desired accomplishments; audit procedures provide the means of achieving audit
objectives.
d. Audit procedures and audit objectives are essentially the same.
92. It means the materials prepared by and for, or obtained and retained by the auditor in connection with the performance of
the audit.
a. Documentation b. Engagement letter
c. Audit evidence d. Audit report
93. Which of the following is not a purpose of working papers?
a. Assist in the planning and performance of the audit.
b. Assist in the supervision and review of the audit work.
c. Record the audit evidence resulting from the audit work performed to support the auditor’s opinion.
d. Support the client’s financial statements.
94. Why does an auditor document audit evidence?
a. To comply with the requirements of gathering all available evidence.
b. To provide client reference for all account balances and correcting entries.
c. To support audit opinion and to provide evidence that the audit was carried out in accordance with PSA.
d. To document all records of misstatements noted in the financial statement
95. When inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence
regarding its existence and condition by attendance at physical inventory counting unless impracticable. Where attendance is
impracticable, due to factors such as the nature and location of the inventory, the auditor should
a. Take or observe some physical counts on an alternative date and, when necessary, perform tests of intervening
transactions.
b. Consider whether alternative procedures provide sufficient appropriate audit evidence of existence and condition to
conclude that the auditor need not make reference to a scope limitation.
c. Issue qualified or disclaimer of opinion.
d. Issue qualified or adverse opinion.
96. It means the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships
that are inconsistent with other relevant information or which deviate from predicted amounts.
a. Analytical procedures b. Tests of controls
c. Substantive procedures d. Audit sampling
97. Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop
this estimate can be obtained from all of the following, except
a. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., budgets and
forecasts), and similar data for the industry in which the entity operates.
b. Study of the relationships of elements of financial data that would be expected to conform to a predictable pattern
based upon the entity’s experience.
c. Study of the relationships of financial data with relevant nonfinancial data.
d. Tracing transactions through the system to determine whether procedures are being applied as prescribed.
98. Analytical procedures used as a substantive procedure focus on
a. Understanding the business and in identifying areas of potential risk.
b. Detecting material misstatements in the financial statements.
c. Obtaining audit evidence about the suitability of design and effective operation of the accounting and internal
control systems
d. Whether the financial statements as a whole are consistent with the auditor’s knowledge of the business.
99. The application of analytical procedures is based on the expectation that relationships among data exist and continue in the
absence of known conditions to the contrary. Which of the following items tend to be the most predictable for purposes of
analytical procedures applied as substantive tests?
a. Relationships involving balance sheet accounts.
b. Transactions subject to management discretion.
c. Relationships involving income statement accounts.
d. Data subject to audit testing in the prior year.
100. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of
gross profit to sales suggests which of the following possibilities?
a. Unrecorded purchases
b. Unrecorded sales
c. Merchandise purchases being charged to selling and general expense
d. Fictitious sales