PRELIM EXAM: QUESTIONNAIRE

1. It refers to the audit procedures deemed necessary in the circumstances to achieve the objective of
the audit.
a. Scope of an audit c. Objective of an audit
b. Audit program d. Reasonable assurance

2. Which of the following is incorrect regarding the general principles of an audit?

a. The auditor should comply with the “Code of Ethics for Professional Ethics for Certified Public
Accountants” promulgated by the Philippine Professional Regulation Commission.
b. The auditor should conduct an audit in accordance with PSAs.
c. The auditor should plan and perform an audit with an attitude of professional skepticism recognizing that
circumstances may exist that cause the financial statements to be materially misstated.
d. The auditor would ordinarily expect to find evidence to support management representations and
assume they are necessarily correct.
3. The auditor’s opinion
a. Enhances the credibility of the financial statements.
b. Is an assurance as to the future viability of the entity.
c. Is an assurance as to the efficiency with which management has conducted the affairs of the entity, but
not effectiveness.
d. Certifies the correctness of the financial statements.
4. The objective of a review of financial statements
a. Is to enable the auditor to express an opinion whether the financial statements are prepared, in all
material respects, in accordance with an identified financial reporting framework.
b. Is to enable an auditor to state whether, on the basis of procedures which do not provide all the
evidence that would be required in an audit, anything has come to the auditor’s attention that causes the
auditor to believe that the financial statements are not prepared, in all material respects, in accordance
with an identified financial reporting framework.
c. Is to carry out those procedures of an audit nature to which the auditor and the entity and any
appropriate third parties have agreed and to report on factual findings.
d. Is to use accounting expertise as opposed to auditing expertise to collect, classify and summarize
financial information.

5. The decision as to whether the criteria are suitable involves considering whether the subject matter is capable of
reasonably consistent evaluation against or measurement using such criteria. The characteristics for determining
whether criteria are suitable include the following, except
a. Relevance b. Reliability: c. Understandability: d. Sufficiency

6. Which of the following types of auditing is performed most commonly by CPAs on a contractual basis?
a. Internal auditing c. Government auditing
b. BIR auditing d. External auditing

7. Which of the following types of audits is performed to determine whether an entity’s financial statements are
fairly stated in conformity with generally accepted accounting principles?
a. Operational audit c. Financial statement audit
b. Compliance audit d. Performance audit

8. Users of financial statements demand independent audit because

a. Users demand assurance that fraud does not exist
b. Management may not be objective in reporting.
c. Users expect auditors to correct management errors.
d. Management relies on the auditor to improve internal control.

9. Which of the following is a correct statement relating to the theoretical framework of auditing?
a. The financial data to be audited can be verified.
b. Short-term conflicts do not exist between managers who prepare data and auditors who examine
data.
c. Auditors do not necessarily need independence.
d. An audit has a benefit only to the owners.

10. Which of the following is an incorrect phrase?

a. Auditing is a systematic process.
b. Auditing subjectively obtains and evaluates evidence.
c. Auditing evaluates evidence regarding assertions.
d. Auditing communicates results to interested users.

11. Which of the following statements is not a distinction between independent auditing and internal
auditing?
a. Independent auditors represent third party users external to the auditee entity, whereas internal
auditors report directly to management.
b. Although independent auditors strive for both validity and relevance of evidence, internal auditors are
concerned almost exclusively with validity.
c. Internal auditors are employees of the auditee, whereas independent auditors are independent
contractors.
d. The internal auditor's span of coverage goes beyond financial auditing to encompass operational
 and performance auditing.

12. Which statement is correct regarding the relationship between internal auditing and the external auditor?
a. Some judgments relating to the audit of the financial statements are those of the internal auditor.
b. The external audit function's objectives vary according to management's requirements.
c. Certain aspects of internal auditing may be useful in determining the nature, timing and extent of
external audit procedures.
d. The external auditor is responsible for the audit opinion expressed, however that responsibility may
be reduced by any use made of internal auditing.

13. Which of the following best describes why an independent auditor reports on financial statements?
a. Independent auditors are likely to detect fraud
b. Competing interests may exist between management and the users of the statements
c. Misstated account balances are generally corrected by an independent audit.
d. Ineffective internal controls may exist.

14. Because an examination in accordance with generally accepted auditing standards is influenced by the
possibility of material errors, the auditor should conduct the examination with an attitude of
a. Professional responsiveness c. Objective judgment
b. Conservative advocacy d. Professional skepticism

15. The best statement of the responsibility of the auditor with respect to audited financial statement is:
a. The audit of the financial statements relieves management of its responsibilities
b. The auditor’s responsibility is confined to his expression of opinion about the audited financial
statements.
c. The responsibility over the financial statements rests with the management and the auditor assumes
responsibility with respect to the notes of financial statements.
d. The auditor is responsible only to his unqualified opinion but not for any other type of opinion.

16. Which of the following is responsible for an entity’s financial statements?

a. The entity’s management c. The entity’s audit committee
b. The entity’s internal auditors d. The entity’s board of directors

17. A financial statement audit:

a. Confirms that financial statement assertion are accurate.
b. Lends credibility to the financial statements.
c. Guarantees that financial statements are presented fairly.
d. Assures that fraud had been detected.

18. An operational audit is designed to

a. Assess the efficiency and effectiveness of management’s operating procedures
b. Assess the presentation of management’s financial statements in accordance with generally accepted
accounting principles
c. Determine whether management has complied with applicable laws and regulations
d. Determine whether the audit committee of the board of directors is effectively discharging its
responsibility to oversee management’s operations

19. Which of the following types of audit uses as its criteria laws and regulations?
a. Operational audit c. Financial statement audit
b. Compliance audit d. Financial audit

20. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter c. Management letter.
b. Audit report d. Financial statements.

21.Examples of the type of information that may come to the auditor's attention that may indicate that
noncompliance with laws or regulations has occurred least likely include
a. Investigation by government departments or payment of fines or penalties.
b. Sales commissions or agent's fees that appear reasonable in relation to those ordinarily paid by the
entity or in its industry or to the services actually received.
c. Unusual transactions with companies registered in tax havens.
d. Media comment.
22.Which of the following circumstances regarding the entity’s noncompliance to laws or regulations may cause the
auditor to resign from an engagement?
a. The auditor is unable to determine whether noncompliance has occurred.
b. If the auditor concludes that the noncompliance has a material effect on the financial statements and
has not been properly reflected in the financial statements.
c. When the entity does not take remedial action that he considers necessary in the circumstances
even when the noncompliance is not material to financial statements.
d. When the disclosure of the effect of noncompliance to legal authority is necessary.

23.If the auditor suspects that members of senior management, including members of the board of directors, are
 involved in noncompliance to laws as regulations, and he believes his report may not be acted upon, he would:
a. Do nothing.
b. Issue a disclaimer of opinion.
c. Consider seeking legal advice.
d. Make special investigation in order to fully determine the extent of client’s noncompliance.
24.An audit client’s board of directors and audit committee refused to take action about an immaterial illegal act that
was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the
engagement. The auditor’s decision to withdraw was primarily due to doubt concerning
a. Inadequate financial statement disclosures.
b. Compliance with the laws.
c. Scope limitations resulting from the inaction.
d. Reliance on management’s representation.
25.An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the
engagement when the
a. Illegal act affects auditor’s ability to rely on management representations.
b. Illegal act has material financial statement implications.
c. Illegal act has received widespread publicity.
d. Auditor cannot reasonably estimate the effect of the illegal act on the financial statements.
26.Communication of a misstatement resulting from fraud, or a suspected fraud, or error to the appropriate level of
management on a timely basis is important because it enables management to take action as necessary.
Ordinarily, the appropriate level of management is
a. At least equal to the level of the persons who appear to be involved with the misstatement or suspected
fraud.
b. At least one level above the persons who appear to be involved with the misstatement or suspected
fraud.
c. The audit committee of the board of directors.
d. The head of internal audit department.
27.The auditor should document
a. Fraud risk factors identified as being present during the auditor’s assessment process.
b. The auditor’s response to fraud risk factors identified.
c. Both a and b.
d. Neither a nor b.

28.If the auditor believes an indicated fraud or error could have a material effect on the financial statements, the
nature, timing and extent of the procedures to be performed depends on the auditor’s judgment as to
a. The type of fraud or error.
b. The likelihood that a particular type of fraud or error could have a material effect on the financial
statements.
c. The likelihood of their occurrence.
d. All of the above.
29.Which of the following should the auditor likely to do when the application of planned audit procedures
indicates the possible existence of fraud or error?
a. The auditor should resign in order to avoid legal responsibility.
b. He should discuss the matter with the person whom he believes is involved with the irregularities.
c. He should consider the potential effect on the financial statements.
d. He should refer the suspected fraud or error to the internal auditor.
30.The auditor may encounter circumstances that, individually or in combination, indicate the possibility that the
financial statements may contain a material misstatement resulting from fraud or error. These circumstances
include the following, except
a. Unrealistic time deadlines for audit completion imposed by management.
b. Conflicting or unsatisfactory evidence provided by management or employees.
c. Information provided unwillingly or after unreasonable delay.
d. Transactions recorded in accordance with management’s general or specific authorization.
31.The nature, timing and extent of procedures may need to be modified in the following ways as possible
responses to the auditor’s assessment of the risk of material misstatement resulting from both fraudulent
financial reporting and misappropriation of assets.
a. The nature of audit procedures performed may need to be changed to obtain evidence that is more
reliable or to obtain additional corroborative information.
b. The timing of substantive procedures may need to be altered to be closer to, or at, year-end.
c. The extent of the procedures applied will need to reflect the assessment of the risk of material
misstatement resulting from fraud.
d. All of the above.
32.Which of the following statements describes why a properly designed and executed audit may not detect
a material fraud?
a. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective
for an intentional misstatement that is concealed through collusion.
b. An audit is designed to provide reasonable assurance of detecting material errors, but there is no
similar responsibility concerning material fraud.
c. The factors considered in assessing control risk indicated an increased risk of intentional
misstatements, but only a low risk of unintentional errors in the financial statements.
d. The auditor did not consider factors influencing audit risk for account balances that have pervasive
effects on the financial statements taken as a whole.
33.The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not
detecting a material misstatement resulting from error because
a. The effect of fraudulent act is likely omitted in the accounting records.
b. Fraud is ordinarily accompanied by acts specifically designed to conceal its existence.
c. Fraud is always a result of connivance between or among employees.
d. The auditor is responsible to detect errors but not fraud.

34. A CPA, while performing an audit, strives to achieve independence in appearance in order to
a. Reduce risk and liability.
b. Comply with the generally accepted standards of field work
c. Become independent in fact.
d. Maintain public confidence in the profession.
35. Which of the following is mandatory if the auditor is to comply with generally accepted auditing
standards?
a. Possession by the auditor of adequate technical training.
b. Use of analytical review on audit engagements.
c. Use of statistical sampling whenever feasible on an audit engagement.
d. Confirmation by the auditor of material accounts receivable balances.
36. The first general standard requires that the audit of financial statements be performed by a person or
persons having adequate technical training and
a. Independence with respect to the financial statements and supplementary disclosures.
b. Exercising professional care as judged by peer reviewers.
c. Proficiency as an auditor, which likely has been acquired from previous experience.
d. Objectivity as an auditor, as verified by proper supervision.
37. The Audit Standard which requires “adequate technical training and proficiency” is normally interpreted as
requiring the auditor to have
a. Formal education in auditing and accounting
b. Adequate practical experience for the work being performed
c. Continuing professional education
d. All of the above
38. Which of the following least likely requires the auditor to send a new engagement letter?
a. An indication that the client misunderstands the objective and scope of the audit.
b. Any revised or special terms of the engagement.
c. A recent change in the audit firm’s management.
d. Legal requirements and other government agencies’ pronouncements.
39. 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.
40. 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 c. Client’s representation letter
b. Audit engagement letter d. Audit program
41. If permission from 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
42. When an independent auditor is approached to perform an audit for the first time, he or she should make
inquiries of the predecessor auditor. Inquiries are necessary because the predecessor may be able to provide
the successor with information that will assist the successor in determining whether
a. The predecessor’s work should be used.
b. The company rotates auditors.
c. In the predecessor’s opinion, control risk is low.
d. The engagement should be accepted.
43. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit
engagement?
a. Analysis of balance sheet accounts
b. Analysis of income statement accounts
c. All matters of continuing accounting significance
d. Facts that might bear on the integrity of management
44. 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.
45. 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.

46. 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.

47. Of the following procedures, which is not considered part of “obtaining an understanding of the client’s
environment?”
a. Examining trade publications to gain a better understanding of the client's industry.
b. Confirming customer accounts receivable for existence and valuation.
c. Touring the client's manufacturing and warehousing facilities to gain a clearer understanding of
operations.
d. Studying the internal controls over cash receipts and disbursements.
48. An initial (first-time) audit requires more audit time to complete than a recurring audit. One of the reasons for this
is that
a. New auditors are usually assigned to an initial audit
b. Predecessor auditors need to be consulted.
c. The client's business, industry, and internal control are unfamiliar to the auditor and need to be carefully
studied.
d. A larger proportion of customer accounts receivable need to be confirmed on an initial audit.
49. Auditors accumulate evidence to
a. defend themselves in the event of a lawsuit.
b. justify the conclusions they have otherwise reached.
c. satisfy the requirements of the Securities Acts of 1933 and 1934.
d. enable them to reach conclusions about the fairness of the financial statements.
50. The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the
a. board of directors.
b. company management.
c. financial statement auditor.
d. company’s internal audit department.
51. Which of the following statements is most correct regarding errors and fraud?
a. An error is unintentional, whereas fraud is intentional.
b. Frauds occur more often than errors in financial statements.
c. Errors are always fraud and frauds are always errors.
d. Auditors have more responsibility for finding fraud than errors.
52. Professional skepticism requires auditors to possess a(n) ______ mind.
a. Introspective
b. Questioning
c. Intelligent
d. Unbelieving
53. Fraudulent financial reporting is most likely to be committed by whom
a. Line employees of the company.
b. Outside members of the company’s board of directors.
c. Company management.
d. The company’s auditors.
54. Fraudulent financial reporting is often called:
a. management fraud.
b. theft of assets.
c. defalcation.
d. embezzlement.
55. If several employees collude to falsify documents, the chance a normal audit would uncover such acts is:
a. very low.
b. very high.
c. zero.
d. none of the above.
56. In testing for cutoff, the objective is to determine:
a. whether all of the current period’s transactions are recorded.
b. whether transactions are recorded in the correct accounting period.
c. the proper cutoff between capitalizing and expensing expenditures.
d. the proper cutoff between disclosing items in footnotes or in account balances.
57. Which of the following factors most likely would cause a CPA to not accept a new audit engagement? 
a. The prospective client has fired its prior auditor.
b. The CPA lacks a thorough understanding of the prospective client's operations and industry.
c. The CPA is unable to review the predecessor auditor's working papers.
d. The prospective client is unwilling to make financial records available to the CPA.
58. Which of the following matters is generally included in an auditor's engagement letter? 
a. Limitations of the engagement.
b. Factors to be considered in establishing preliminary judgments about materiality.
c. Management's liability for illegal acts committed by its employees.
d. The auditor's responsibility to obtain negative assurance relating to the occurrence of illegal acts.
59. When a company has changed auditors, according to the Professional Standards: 
a. The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about
the client before the engagement is accepted; the predecessor has no responsibility to initiate this
contact, even when aware of matters bearing on the integrity of management.
b. The predecessor must respond fully to all inquiries made by the successor auditor.
c. The successor must discuss with the predecessor matters bearing on the engagement prior to accepting
the engagement.
d. The successor may choose not to attempt any communication with the predecessor auditor.
60. Which of the following statements is accurate about "fraud risk factors" considered when conducting an audit? 
a. Factors whose presence indicates that fraud exists.
b. Factors whose presence often have been observed in circumstances where frauds have occurred.
c. Factors whose presence will require modification to planned audit procedures.
d. Factors obtained during the audit which lead to required communications with the audit committee.
61. Which of the following topics is not normally included in an engagement letter? 
a. The auditors' preliminary assessment of internal control.
b. The auditors' estimate of the fee for the engagement.
c. Limitations on the scope of the engagement.
d. A description of responsibility for the detection of fraud.
62. Which of the following is not an assertion that is made in the financial statements by management concerning
each major account balance? 
a. Completeness.
b. Rights and obligations.
c. Legality.
d. Valuation.

63. Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors.
The best place to set forth these arrangements is in: 
a. A memorandum to be placed in the permanent section of the auditing working papers.
b. An engagement letter.
c. A client representation letter.
d. A confirmation letter attached to the constructive services letter.
64. Material misstatements may emanate from all of the following except:
a. Fraud
b. Error
c. Noncompliance with laws and regulations
d. Inadequacy of accounting records
65. This level of assurance provided by an audit of detecting a material misstatement is referred to as:
a. Reasonable assurance.
b. Moderate assurance.
c. Absolute assurance.
d. Negative assurance.
66. Which of the following terms relates to the embezzling of receipts?
a. Manipulation
b. Misrepresentation
c. Misappropriation
d. Misapplication
67. Engagement letters
a. May be either oral or written.
b. Must be written.
c. Must be written and notarized.
d. Must be written if the client is regulated by the Securities and Exchange Commission.
68. Which of the following would be least likely to be included in the auditor’s engagement letter?
a. Forms of the report
b. Extent of his responsibilities to his client
c. Objectives and scope of the audit
d. Type of opinion to be issued
69. Investigation of new clients and reevaluation of existing ones is an essential part of deciding
a. Inherent risk
b. Whether to accept engagement
c. Statistical risk
d. Financial risk
70. This assertion addresses whether all transactions that should be included in the financial statements are in fact
included.
a. occurrence
b. completeness
c. rights and obligations
d. existence