Tqs Finals Operations-Audit
Tqs Finals Operations-Audit
Operations Audit
I. Instructions: Read each question carefully then write the letter of the correct/best answer in the
answer sheet provided.
2. Which of the following best describes the scope of internal auditing as it has developed to date?
A. Internal auditing involves appraising the economy and efficiency with which resources are
employed.
B. Internal auditing has evolved to verifying the existence of assets and reviewing the means of
safeguarding assets.
C. Internal auditing has evolved to more of an operational orientation from a strictly financial
orientation.
D. Internal auditing has evolved to verifying the existence of assets and reviewing the means of
safeguarding assets.
3. Which of the following is considered a primary reason for creating an internal audit department?
A. To evaluate and improve the effectiveness of control processes.
B. To ensure the accuracy, reliability, and timeliness of financial and operating data used in
management’s decision making.
C. To relieve management of the responsibility for establishing effective controls.
D. To safeguard resources entrusted to the organization.
4. In conducting an appraisal of the economy and efficiency with which company resources are used, an
internal auditor’s responsibility is to
A. Verify the accuracy of asset valuation.
B. Review the reliability of operating information.
C. Verify the existence of assets.
D. Determine whether operating standards have been established.
5. Operational audits generally have been conducted by internal and COA auditors, but may be
performed by certified public accountants. A primary purpose of an operational audit is to provide
A. A measure of management performance in meeting organizational goals.
B. The results of internal examinations of financial and accounting matters to a company’s top-level
management.
C. Aid to the independent auditor, who is conducting the examination of the financial statements.
D. A means of assurance that internal accounting controls are functioning as planned.
6. Governmental auditing often extends beyond examinations leading to the expression of opinion on
the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also
A. Accuracy
B. Compliance
C. Evaluation
D. Internal Control
7. A governmental audit may extend beyond an audit leading to the expression of opinion on the
fairness of financial presentation to include
Program Results Compliance Economy and Efficiency
A. Yes Yes Yes
B. Yes Yes No
C. Yes No Yes
D. No Yes Yes
9. In comparison to the independent auditor, an internal auditor is more likely to be concerned with
A. Legal and regulatory compliance.
B. Cost accounting procedures.
C. Operational auditing.
D. Internal control system.
11. One of a CPA firm’s basic objectives is to provide professional services that comply with
professional standards and regulatory and legal requirements. Reasonable assurance of achieving this
basic objective is provided through
A. A system of quality control.
B. Continuing professional education.
C. Compliance with generally accepted reporting standards.
D. Compliance with the fundamental principles of the Philippine Code of Ethics.
12. Quality control policies and procedures should provide the firm with reasonable assurance that the
policies and procedures relating to the other elements of quality control are being effectively applied.
This statement defines the quality control element of
A. Acceptance and continuance of client relationships and specific engagements.
B. Ethical requirements.
C. Monitoring.
D. Leadership responsibility for quality within the firm.
13. A CPA firm should establish procedures for conducting and supervising work at all organizational
levels to provide reasonable assurance that the work performed meets the firm’s standards of quality. To
achieve this goal, the firm most likely would establish procedures for
A. Evaluating prospective and continuing client relationships.
B. Reviewing engagement working papers and reports.
C. Requiring personnel to adhere to the applicable independence rules.
D. Maintaining personnel files containing documentation related to the evaluation of
personnel.
14. PSA 220 (revised) requires the engagement partner to consider whether members of the engagement
team have complied with the ethical requirements relating to audit engagements of the Philippine Code.
The Philippine Code establishes the fundamental principles of professional ethics, which include
I Integrity
II Objectivity
III Professional competence and due care
IV Confidentiality
V Professional behavior
15. Which of the following matters should be considered by the auditor in developing the overall audit
strategy?
A. Important characteristics of the entity, its business, its financial performance and its reporting
requirements including changes since the date of the prior audit.
B. Conditions requiring special attention, such as the existence of related parties.
C. The setting of materiality levels for audit purposes.
D. All of the above.
16. Audit risk has three components: inherent risk, control risk, and detection risk. Which of the
following statements is correct?
A. Detection risk is a function of the efficiency of an auditing procedure.
B. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent
risk.
C. The risk that material misstatements will not be prevented or detected on a timely basis by
internal control can be reduced to zero by effective controls.
D. The existing levels of inherent risk, control risk, and detection risk can be changed at the
discretion of the auditor.
17. 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
18. 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.
19. 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
B. Internal control
C. Business strategy
D. Accounting process
20. This internal control component is the foundation for all other components. It sets the tone of the
organization, provides discipline and structure, and influences the control consciousness of employees.
A. Control activities
B. Monitoring of controls
C. Control environment
D. The entity’s risk assessment process.
22. Control activities constitute one of the five components of internal control. Which of the following
is not included in this internal control component?
A. Segregation of duties
B. Performance reviews
C. An internal audit function
D. Authorization
24. When obtaining knowledge about an entity’s internal control, it is important for the auditor to
consider the competence of its employees, because their competence bears directly and importantly upon
the
A. Cost-benefit relationship of internal control.
B. Comparison of recorded accountability with assets.
C. Achievement of the objectives of internal control.
D. Timing of substantive tests to be performed.
25. The primary objective of procedures performed to obtain an understanding of internal control is to
provide an auditor with
A. Knowledge necessary to plan the audit.
B. A basis for modifying tests of controls.
C. Information necessary to prepare flowcharts.
D. Evidence to use in reducing detection risk.
27. As a result of obtaining an understanding of an entity’s internal control system, the auditor may
become aware of material weaknesses in the design or implementation of internal control. The auditor is
required to communicate this matter to
A. Those charged with governance or management
B. Chief executive officer
C. Securities and Exchange Commission
D. Board of Accountancy
28. Which of the following controls most likely would provide reasonable assurance that all credit sales
transactions of an entity are recorded?
A. The accounting department supervisor controls the mailing of monthly statements
to customers and investigates any differences reported by customers.
B. The accounting department supervisor independently reconciles, on a monthly basis, the
accounts receivable subsidiary ledger to the accounts receivable control account.
C. The billing department supervisor matches prenumbered shipping documents with entries
in the sales journal.
D. The billing department supervisor sends copies of approved sales orders to the credit department
for comparison to authorized credit limits and current customer account balances.
29. A sound internal control procedure should require that defective merchandise returned by customers
be presented initially to the
A. Receiving clerk
B. Accounts receivable supervisor
C. Billing clerk
D. Shipping department supervisor
30. Macho Dancer Company uses its sales invoices for posting perpetual inventory records. Inadequate
internal control over the invoicing function allows goods to be shipped but not invoiced. The inadequate
controls could cause what type of misstatement in each of the following accounts?
Revenues Receivables Inventories
A. Understatement Understatement Understatement
B. Overstatement Overstatement Understatement
C. Understatement Understatement Overstatement
D. Overstatement Overstatement Overstatement
31. Which of the following control activities in an entity’s revenue/receipt cycle would provide
reasonable assurance that all billed sales are correctly posted to the accounts receivable ledger?
A. Each shipment of goods on credit is supported by a prenumbered sales invoice.
B. The accounts receivable subsidiary ledger is reconciled daily to the accounts receivable control
account in the general ledger.
C. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
D. Each sales invoice is supported by a prenumbered shipping document.
32. The auditor’s primary objective in obtaining an understanding of the client’s controls over the
purchasing function is to
A. Investigate the recording of unusual transactions regarding raw materials.
B. Determine the reliability of financial reporting by the purchasing function.
C. Observe the annual physical count.
D. Ascertain that raw materials paid for are on hand.
33. Effective controls relevant to purchasing of raw materials should usually include all of the
following, except
A. Determining the need for the raw materials prior to preparing the purchase order.
B. Systematic reporting of product changes that will affect raw materials.
C. Obtaining financial approval prior to making a commitment.
D. Obtaining third-party written quality and quantity reports prior to payment for the raw
materials.
34. Which of the following controls is not usually performed in the accounts payable department?
A. Indicating on the voucher the affected asset and expense accounts to be debited.
B. Approving vouchers for payment by having an authorized employee sign the vouchers.
C. Accounting for unused prenumbered purchase orders and receiving reports.
D. Matching the vendor’s invoice with the related purchase requisition, purchase order, and
receiving report.
35. The following are appropriate questions on an internal control questionnaire concerning purchase
transactions, except
A. Are all goods received in a centralized receiving department and counted, inspected, and
compared with purchase orders on receipt?
B. Are intact cash receipts deposited daily in the bank?
C. Are prenumbered purchase orders and receiving reports used and accounted for?
D. Are an approved purchase requisition and a signed purchase order required for each purchase?
36. Which of the following is of least concern to an auditor in assessing the risks of material
misstatement?
A. Signed checks are distributed by the controller to approved payees.
B. Checks are signed by one person.
C. Cash receipts are not deposited intact daily.
D. Treasurer does not verify the names and addresses of check payees.
37. Which of the following is an essential control procedure to ensure the accuracy of the recorded
inventory quantities?
A. Calculating unit costs and valuing obsolete or damaged inventory items in accordance
with inventory policy.
B. Testing inventory extensions.
C. Performing a gross profit test.
D. Establishing a cutoff for goods received and shipped.
38. Effective internal controls over inventories are designed and implemented for the following reasons,
except
A. Inventories typically represent a large component of an entity’s current assets.
B. Inventories are the most liquid assets.
C. Inventories directly affect the financial performance of an entity.
D. Inventories typically represent a large portion of an entity’s total assets.
39. Your client, a merchandising concern, has annual sales of P30,000,000 and a 40% gross profit rate.
Tests reveals that 2% of the peso amount of purchases do not get into inventory because of breakage and
inventory pilferage by employees. The company estimates that these losses could be reduced to 0.5% of
purchases by designing and implementing certain controls costing approximately P350,000. Should the
controls be designed and implemented?
A. Yes, regardless of cost-benefit considerations, because the situation involves employee theft.
B. Yes, because the ideal system of internal control is the most extensive one.
C. No, because the cost of designing and implementing the added controls exceeds the
projected savings.
D. Yes, because the expected benefits to be derived exceed the cost of the added controls.
40. Which of the following controls most likely would be implemented to achieve the production cycle
control objective of maintaining accurate inventory records?
A. Periodic inventory counts are used to adjust the perpetual inventory records.
B. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.
C. Perpetual inventory records are periodically compared with the net realizable value of individual
inventory items.
D. Purchase requisitions, receiving reports, purchase orders, and vendor invoices are
independently matched before payment is approved.
41. Which of the following is the most likely procedure an auditor would perform in obtaining an
understanding of a manufacturing entity’s internal control for inventory balances?
A. Perform test counts of inventory when observing the entity’s physical count.
B. Perform analytical procedures designed to identify significant cost variances.
C. Analyze the liquidity and turnover ratio of the inventory.
D. Review the entity’s description of inventory policies and procedures.
42. The following controls are appropriate for property, plant, and equipment (PPE), except,
A. Written policies for capitalization and expenditure and review of application of
depreciation methods.
B. Disposal of fully depreciated PPE items.
C. Proper authority for acquisition and retirement of PPE items.
D. Detailed PPE records and physical controls over PPE items.
43. An internal control objective concerning property, plant, and equipment (PPE) acquisitions is that
they be recorded at the correct amounts and in the proper period, and properly classified. In which of the
following conditions would an auditor most likely to assess a high level of risk of material
misstatements?
A. All material acquisitions of PPE are required to be approved by the board of directors.
B. Most additions are self-constructed by the entity.
C. Recently acquired loans include covenants that preclude further plant acquisitions for 5 years.
D. Gross PPE increased 30% during the current period.
44. Which of the following controls would an entity most likely used in safeguarding against the loss of
trading securities?
A. The independent auditor traces all purchases and sales of trading securities through the
subsidiary ledgers to the general ledger.
B. An independent trust company that has no direct contact with the employees who have
record keeping responsibilities has possession of the securities.
C. The internal auditor inspects the trading securities in the entity’s safe each year on the balance
sheet date.
D. A designated member of the board of directors controls the securities in a bank safe-
deposit box.
45. The following controls are designed to protect investment securities, except
A. Investment securities should be properly controlled physically in order to prevent unauthorized
usage.
B. Custody over investment securities should be limited to personnel having record-keeping
responsibility over the securities.
C. Securities should be registered in the entity’s name.
D. Access to securities should be vested in two individuals.
47. Organizational independence in the processing of payroll can be achieved by segregating the
functions of authorization, record-keeping, and custody of assets. Which one of the following functional
separations is not required for internal control purposes?
A. Separation of payroll preparation and paycheck distribution.
B. Separation of personnel function from payroll preparation.
C. Separation of timekeeping from payroll preparation.
D. Separation of payroll preparation and maintenance of year-to-date records.
48. Which of the following situations represents an internal control weakness in the payroll department?
A. The timekeeping function is independent of the payroll department.
B. Payroll records are periodically reconciled with tax reports.
C. Paychecks are distributed by the employees’ immediate supervisor.
D. Payroll department personnel are rotated in their duties.
49. Which of the following personnel department procedures reduces the risk of payroll fraud and
represents an appropriate responsibility for the department?
A. Authorizing the addition or deletion of employees from the payroll.
B. Authorizing overtime hours.
C. Collection and retention of unclaimed paychecks.
D. Distributing paychecks.
50. Employees of a manufacturing entity are often required to use time cards and job time tickets.
Which of the following statements concerning the use of these documents is incorrect?
A. Time reported on job time tickets should be reconciled to time cards.
B. Payroll should be calculated based on job time tickets.
C. Each employee should have only one time card.
D. An employee may have one or many job time tickets in a day.
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1. In a financial statement audit, the auditor is required to perform tests of controls when
A. I only
B. II only
C. Either I or II
D. Neither I nor II
2. Tests of controls are concerned primarily with each of the following questions, except
A. By whom were the controls applied?
B. Were the necessary controls consistently performed?
C. How were the controls applied?
D. Why were the controls?
4. An auditor intends to perform tests of control on a client’s cash disbursements procedures. If the
control procedures leave no audit trail of documentary evidence, the auditor most likely will test the
procedures by
A. Inquiry and analytical procedures.
B. Inquiry and observation.
C. Analytical procedures and confirmation.
D. Confirmation and observation.
5. The following statements relate to the use of audit evidence when testing the operating effectiveness
of relevant controls. Which is false?
A. An auditor who obtains sufficient appropriate audit evidence about the operating
effectiveness of controls during the interim period should no longer obtain additional
evidence of operating effectiveness for the remaining period.
B. An auditor may plan to use audit evidence about the operating effectiveness of controls obtained
in prior audits.
C. If an auditor plans to rely on controls that have changed since they were last tested, the auditor
should test the operating effectiveness of such controls in the current audit.
D. Audit evidence pertaining only to appoint in time may be sufficient for the auditor’s purpose, for
example, when testing controls over an entity’s physical count of inventories at year-end.
6. After gaining an understanding of internal control and assessing the risks of material misstatement,
an auditor decided to perform tests of controls. The auditor most likely decided that
A. Additional evidence to support a further reduction in control risks is not available.
B. It is not possible or practicable to reduce the risks of material misstatement at the assertion
level to an acceptably low level with audit evidence obtained only from substantive test
procedures.
C. There were many internal control weaknesses that could allow misstatements to enter the
accounting system.
D. An increased in the assessed level of control risk is justified for certain financial statement
assertions.
7. An auditor may decide to assess control risk at the maximum level for certain assertions because the
auditor believes
A. Controls are unlikely to pertain to the assertions.
B. The entity’s control components are interrelated.
C. Sufficient appropriate audit evidence to support the assertions is likely to be available.
D. More emphasis on tests of controls than substantive tests is warranted.
8. Which of the following statements is correct concerning an auditor’s assessment of control risk?
A. Assessing control risk may be performed concurrently during an audit with
obtaining an understanding of the entity’s internal control.
B. Evidence about the operation of controls in prior audits may not be considered during the current
year’s assessment of control risk.
C. The basis for an auditor’s conclusions about the assessed level of control risk need not be
documented unless control risk is assessed at the maximum level.
D. The lower the assessed level of control risk, the less assurance the evidence must provide that the
controls are operating effectively.
9. According to PSA 330 (The Auditor’s Procedures in Response to Assessed Risks), an auditor who
plans to rely on controls that have not changed since they were last tested should test the operating
effectiveness of such controls at least once every
A. Second audit
B. Third audit
C. Fourth audit
D. Fifth audit
10. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed
level of control risk from that originally planned. To achieve an overall audit risk level that is
substantially the same as the planned audit risk level, the auditor would
A. Increase inherent risk.
B. Increase materiality level.
C. Decrease inherent risk.
D. Decrease detection risk.
11. When an auditor increases the planned assessed level of control risk because certain controls were
determined to be ineffective, the auditor would most likely increase the
A. Extent of tests of details.
B. Level of inherent risk.
C. Extent of tests of controls.
D. Level of detection risk.
12. Regardless of the assessed level of control risk, an auditor would perform some
A. Tests of controls to determine the effectiveness of internal control policies.
B. Analytical procedures to verify the design of internal control procedures.
C. Substantive tests to restrict detection risk for significant transaction classes.
D. Dual-purpose tests to evaluate both the risk of monetary misstatements and preliminary control
risk.
13. When an accounting application is processed by computer, an auditor cannot verify the reliable
operation of programmed control procedures by
A. Manually comparing detail transaction files used by an edit program with the program’s
generated error listings to determine that errors were properly identified by the edit program.
B. Constructing a processing system for accounting applications and processing actual data from
throughout the period through both the client’s program and the auditor’s program.
C. Manually reperforming, as of a moment in time, the processing of input data and
comparing the simulated results with the actual results.
D. Periodically submitting auditor-prepared test data to the same computer process and evaluating
the results.
14. In performing tests of the operating effectiveness of an entity’s controls, an auditor selects from a
variety of techniques, including
A. Reperformance and observation.
B. Inquiry and analytical procedures.
C. Comparison and confirmation.
D. Inspection and verification.
15. An auditor intends to perform tests of control on a client’s cash disbursement procedures. If the
control procedures leave no audit trail of documentary evidence, the auditor most likely will test the
procedures by
A. Inquiry and analytical procedures.
B. Inquiry and observation.
C. Analytical procedures and confirmation.
D. Confirmation and observation.
16. Which of the following tests of controls most likely would help assure an auditor that goods shipped
are properly billed?
A. Scan the sales journal for sequential and unusual entries.
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable ledger to daily sales invoices.
D. Inspect unused sales invoices for consecutive prenumbering.
18. An auditor uses the knowledge provided by the understanding of internal control and the final
assessed level of control risk primarily to determine the nature, timing, and extent of the
A. Attribute tests
B. Compliance tests
C. Tests of controls
D. Substantive tests
19. When there are numerous property and equipment transactions during the year, an auditor who
plans to assess control risk at a low level usually performs
A. Tests of controls and extensive tests of property, plant and equipment balances at the end of the
year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment
transactions.
D. Analytical procedures for property and equipment balances at the end of the year.
20. Which of the following procedures concerning accounts receivable would an auditor most likely to
perform to obtain evidential matter in support of an assessed level of controls risk below the maximum
level?
A. Observing an entity’s employee prepare the schedule of past due accounts receivable,
B. Sending confirmation request’s to an entity’s principal customers to verify the existence of
accounts receivable.
C. Inspecting an entity’s analysis of accounts receivable for unusual balances.
D. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts
receivable.
22. Which of the following types of evidence would an auditor most likely examine to determine
whether controls are operating as designed?
A. Confirmations of receivables verifying account balances.
B. Letters of representations corroborating inventory pricing.
C. Attorney’s responses to the auditor’s inquiries.
D. Client records documenting the use of computer programs.
23. An internal control questionnaire indicates that an approved receiving report is required to
accompany every check request for payment of merchandise. Which of the following procedures
provides the greatest assurance that this control is operating effectively?
A. Select and examine receiving reports and ascertain that the related canceled checks are dated no
earlier than the receiving reports.
B. Select and examine receiving reports and ascertain that the related canceled checks are dated no
later than the receiving reports.
C. Select and examine cancelled checks and ascertain that the related receiving reports are dated no
earlier than the checks.
D. Select and examine cancelled checks and ascertain that the related receiving reports are
dated no later than the checks.
24. Based on observations made during an audit, the independent auditor should discuss with
management the effectiveness of the company’s controls that protect against the purchase of
A. Required supplies provided by vendor who offers no trade discounts.
B. Required supplies provided by vendor who offers no cash discounts.
C. Inventory items acquired based on an economic order quantity (EOQ) inventory management
concept.
D. Supplies individually ordered, without considering possible volume discounts.
25. In assessing control risk for the purchasing cycle, the auditor will be least influenced by
A. The effectiveness of the controls in other cycles, e.g., the sales-receivables-cash receipts
cycle.
B. The existence within the purchasing cycle of internal control strengths that offset weaknesses.
C. The audit work performed in the purchasing cycle by the company’s internal auditor.
D. The availability of a company manual describing policies and procedures for the purchasing
cycle.
Materiality should be considered by the auditor when determining the nature, timing and
extent of audit procedures.
There is an inverse relationship between materiality and the level of audit risk.
2. Which of the following would an auditor most likely use in determining the auditor’s preliminary
judgment about materiality.
A. The anticipated sample size of the planned substantive tests.
B. The entity’s annualized interim financial statements.
C. The results of the internal control questionnaire.
D. The contents of the management representation letter.
3. In evaluating the fair presentation of the financial statements, the auditor should assess whether the
aggregate of uncorrected misstatements that have been identified during the audit is material. The
aggregate of uncorrected misstatements comprises
I. Specific misstatements identified by the auditor including the net effect of uncorrected
misstatements identified during the audit of previous period.
II. The auditor’s best estimate of other misstatements which cannot be specifically identified.
A. I only
B. II only
C. Both I and II.
D. Neither I nor II.
5. For audits of financial statements made in accordance with PSAs, the use of analytical procedures is
required to some extent
In the Planning Stage As a Substantive Test In the Final Review Stage
A. No Yes Yes
B. Yes Yes No
C. Yes No Yes
D. No No No
9. Which of the following procedures would an auditor most likely to perform in planning a financial
statement audit?
A. Inquiring about the client’s legal counsel concerning pending litigation.
B. Comparing the financial statements with anticipated results.
C. Examining computer-generated exception reports to verify the effectiveness of internal control.
D. Searching for unauthorized transactions that may aid in directing unrecorded liabilities.
10. 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 period.
11. The primary objective of analytical procedures used in the overall review stage of an audit is to
A. Obtain evidence from details testing to corroborate particular assertions.
B. Identify areas that represent specific risks relevant to the audit.
C. Assist the auditor in assessing the validity of the conclusions reached.
D. Satisfy doubts when questions arise about a client’s ability to continue in existence.
12. Analytical procedures used in the overall review stage of an audit generally include
A. Considering unusual or unexpected account balances that were not previously identified.
B. Performing tests of transactions to corroborate management’s financial statement assertions.
C. Gathering evidence concerning account balances that have not changed from the prior year.
D. Retesting controls that appeared to be ineffective during the assessment of control risk.
13. When auditing related party transactions, an auditor places primary emphasis on
A. Confirming the existence of the related parties.
B. Verifying the valuation of the related party transactions.
C. Evaluating the disclosure of the related party transactions.
D. Ascertaining the rights and obligations of the related parties.
14. Which of the following auditing procedures most likely would assist an auditor in identifying
related party transactions.
A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
B. Vouching accounting records for recurring transactions recorded just after the balance sheet date.
C. Reviewing confirmations of loans receivable and payable for indications of guarantees.
D. Performing analytical procedures for indications of possible financial difficulties.
15. Which of the following most likely would indicate the existence of related parties?
A. Writing down obsolete inventory just before year-end.
B. Failing to correct previously identified internal control deficiencies.
C. Depending on a single product for the success of the entity.
D. Borrowing money at an interest rate significantly below the market rate.
16. After determining that a related party transactions has, in fact, occurred an auditor should
A. Substantiate that related party transactions were consummated on terms equivalent to those that
prevail in arm’s-length transactions.
B. Perform analytical procedures to verify whether similar transactions have occurred, but were not
recorded.
C. Obtain an understanding of the purpose of the transactions.
D. Determine whether a particular transaction would have occurred if the parties had not been
related.
17. The external auditor should obtain a sufficient understanding of the internal audit function because
A. The understanding of the internal audit function is an important substantive test to be performed
by the external auditor.
B. The audit programs, working papers, and reports of internal auditors may often be used as a
substitute for the work of the external auditor’s staff.
C. The procedures performed by the internal audit staff may eliminate the external auditor’s need
for considering internal control.
D. The work performed by internal auditors may be a factor in determining the nature,
timing, and extent of the external auditor’s procedures.
18. If the external auditor decides that it is efficient to consider how the work performed by the internal
auditors may affect the nature, timing, and extent of audit procedures, he/she should assess the internal
auditors’
A. Efficiency and experience
B. Independence and review skills
C. Training and supervisory skills
D. Competence and objectivity
19. In assessing the technical competence of an internal auditor, an external auditor most likely would
obtain information about the
A. Quality of working paper documentation, reports, and recommendations.
B. Organizational level to which the internal auditor reports.
C. Influence of management on the internal auditor’ duties.
D. Entity’s commitment to integrity and ethical values.
20. PSA 620 (Using the Work of an Expert) provides guidance on using the work of an expert as audit
evidence. According to this standard, an expert may be
A. Contracted by the auditor but never by the entity.
B. Contracted by the entity but never by the auditor.
C. Contracted but not employed by the entity.
D. Contracted or employed by the entity or auditor.
21. Which of the following statements is correct concerning the auditor’s use of the work of an expert?
A. The auditor is required to perform substantive test procedures to verify the expert’s assumptions
and findings.
B. The auditor should obtain an understanding of the methods and assumptions used by the
expert.
C. The should not have an understanding of the nature of the work to be performed by the expert.
D. The expert should not have an understanding of the auditor’s corroborative use of the expert’s
findings.
22. In using the work of an expert, an understanding should exist among the auditor, the entity and the
expert as to the nature, scope, and objective of the expert’s work. The documentation of this
understanding should cover
A. The conditions under which a division of responsibility may be necessary.
B. A statement that the expert assumes no responsibility to update the expert’s report for future
events or circumstances.
C. The intended use by the auditor of the expert’s work, including the possible
communication to third parties of the expert’s identity and extent of involvement.
D. The auditor’s disclaimer as to whether the expert’s findings corroborate the representations in the
financial statements.
23. Which of the following is not an expert upon whose work an auditor may rely?
A. Actuary
B. Engineer
C. Appraiser
D. Internal auditor
24. If the results of the expert’s work do not provide sufficient appropriate audit evidence or
are not consistent with other audit evidence, the auditor should
A. Report the matter to the appropriate regulatory agency of the government.
B. Resolve the matter.
C. Withdraw from the engagement.
D. Express an unqualified opinion with reference to the work of the expert.
2. The quantity of audit evidence needed is affected by the risk of misstatement and also by the quality
of such audit evidence.
The reliability of audit evidence is influenced by its source and by its nature and is dependent on the
individual circumstances under which it is obtained.
A. Both statements are true.
B. Both statements are false.
C. True; False
D. False; True
4. Management makes certain assertions that are embodied in financial statement components; for
example, two such categories of assertions are completeness and valuation and allocation. Which of the
following is not a broad category of management assertions?
A. Rights and obligations
B. Completeness
C. Existence
D. Errors or fraud
6. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. Financial statements to the potentially unrecorded items.
B. Potentially unrecorded items to the financial statements.
C. Accounting records to the supporting evidence.
D. Supporting evidence to the accounting records.
7. In determining whether transactions have been recorded, the direction of the audit testing should be
from the
A. General ledger balances
B. Adjusted trial balance
C. Original source documents
D. General journal entries
9. Which of the following is an example of “other information” that could be used by an auditor as
evidential matter supporting the financial statements.
A. Worksheets supporting cost allocations.
B. Confirmation of accounts receivable.
C. Special journals.
D. Accounting manuals.
10. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the
following is the least persuasive type of evidence?
A. Bank statement obtained from the client.
B. Test counts of inventory made by the auditor.
C. Prenumbered purchase order forms.
D. Correspondence from the client’s attorney about litigation.
11. Which of the following types of audit evidence is the most persuasive?
A. Prenumbered purchase order forms.
B. Client worksheets supporting cost allocations.
C. Bank statements obtained from the client.
D. Client representation letter.
12. Which of the following generalizations does not relate to the appropriateness of evidence?
A. Audit evidence from external sources (for example, confirmation received from a third party) is
more reliable than the generated internally.
B. An auditor’s opinion, to be economically useful, is formed within reasonable time and
based on evidence obtained at a reasonable cost.
C. Audit evidence generated internally is more reliable when the related accounting and internal
control systems are effective.
D. Audit evidence obtained directly by the auditor is more reliable than that obtained from the
entity.
13. Each of the following might, by itself, form a valid basis for an auditor to decide to omit a test
except for the
A. Difficulty and expense involved in testing a particular item.
B. Assessment of control risk at a low level.
C. Inherent risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.
15. PSA 500 requires the auditor to use assertions for classes of transactions, account balances, and
presentation and disclosures in sufficient detail to form a basis for the assessment of risks of material
misstatements and the design and performance of further audit procedures. Assertions about classes of
transactions include occurrence, completeness, accuracy, cutoff, and
A. Valuation and and allocation.
B. Rights and obligations.
C. Existence.
D. Classification.
!6. In which of the following circumstances would the use of the negative form of accounts receivable
confirmation most likely to be justified?
A. A substantial number of accounts may be in dispute and the accounts receivable balance
arises from sales to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts receivable balance arises
from sales to many customers with small balances.
C. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to few major customers.
D. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to many customers with small balances.
17. Which of the following statements is correct concerning the use of negative confirmation requests?
A. Unreturned negative confirmation requests rarely provide significant explicit evidence.
B. Negative confirmation requests are effective when detection risk is low.
C. Unreturned negative confirmation requests indicate that alternative procedures are necessary.
D. Negative confirmation requests are effective when understatements of account balances are
suspected.
18. An auditor most likely would review an entity’s periodic accounting for the numerical sequence of
shipping documents and invoices to support management’s financial statement assertion of
A. Existence
B. Rights and obligations
C. Valuation and allocation
D. Completeness
19. Which of the following might be detected by an auditor’s review of the client’s sales cut-off?
A. Excessive goods returned for credit.
B. Unrecorded sales discounts.
C. Lapping of year-end accounts receivable.
D. Inflated sales for the year.
20. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded
in the subsequent year provide assurance about management’s assertion of
A. Classification C. Rights and obligations.
B. Cutoff D. Existence
21. Which of the following most likely would give the most assurance concerning the valuation
and allocation assertion of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping documents.
B. Comparing receivable turnover ratios with industry statistics for reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for uncollectible accounts for reasonableness.
22. Confirmation is “the process of obtaining and evaluating a direct communication from a third party
in response to a request for information about a particular item affecting financial statement assertions.”
Two assertions for which confirmation of accounts receivable balances provides primary evidence are
A. Completeness and valuation.
B. Valuation and rights and obligations.
C. Rights and obligations and existence
D. Existence and completeness
23. An auditor confirms a representative number of open accounts receivable as of December 31 and
investigates respondents’ exceptions and comments. By this procedure the auditor would be most likely
to learn of which of the following?
A. One of the cashiers has been covering a personal embezzlement by lapping.
B. One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
C. One of the computer control clerks has been removing all sales invoices applicable to his account
from the data file.
D. The credit manager has misappropriated remittances from customers whose accounts have been
written off.
24. The auditor may consider confirming accounts receivable balances at an interim date if
A. Collections subsequent to year-end are to be reviewed
B. The assessed level of risk of material misstatement relative to financial statement assertions
about receivables is acceptably low.
C. Negative confirmations are to be used for a sample of accounts.
D. Cash and accounts receivable are audited at the same time.
25. When an auditor does not receive replies to positive requests for year-end accounts receivable
confirmations, the auditor most likely would
A. Inspect the allowance account to verify whether the accounts were subsequently written off.
B. Increased the assessed level of detection risk for the valuation and completeness assertions.
C. Send the customer a second confirmation.
D. Increase the assessed level of inherent risk for the revenue cycle.
26. The return of positive accounts receivable confirmation without an exception attests to the
A. Collectibility of the accounts receivable.
B. Accuracy of the aging of accounts receivable.
C. Accuracy of the receivables balance.
D. Accuracy of the allowance for bad debts.
27. Which of the following procedures would an auditor most likely to perform for year-end accounts
receivable confirmations when the auditor did not receive replies to second requests?
A. Review the cash receipts journal for the month prior to year-end.
B. Intensify the study of internal control concerning the revenue cycle.
C. Increased the assessed level of detection risk for the existence assertion.
D. Inspect the shipping records documenting the merchandise sold to the debtors.
28. Which of the following sets of information does an auditor usually confirm on one form?
A. Accounts payable and purchase commitments.
B. Cash in bank and collateral for loans.
C. Inventory on consignment and contingent liabilities.
D. Accounts receivable and accrued interest receivable.
29. The primary purpose of sending a standard confirmation request to financial institutions with which
the client has done business during the year is to
A. Detect kiting activities that may otherwise not be discovered.
B. Corroborate information regarding deposit and loan balances.
C. Provide data necessary to prepare proof of cash.
D. Request information about contingent liabilities and secured transactions.
30. Which of the audit procedures is the most appropriate when internal control over cash is weak or
when a client request for an investigation of cash transactions?
A. Proof of cash.
B. Bank reconciliation.
C. Cash confirmation.
D. Evaluate ratio of cash to current liabilities
31. The usefulness of the standard bank confirmation request may be limited because the bank
employee who completes the form may
A. Not believe that the bank is obligated to verify confidential information to third party.
B. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation.
C. Not have access to the client’s cutoff bank statement.
D. Be unaware of all the financial relationships that the bank has with the client.
32. An auditor should test bank transfers for the last part of the audit period and first part of the
subsequent period to detect whether
A. The cash receipts journal was held open for a few days after year-end.
B. The last checks recorded before year-end were actually made by year-end.
C. Cash balances were overstated because of kiting.
D. Any unusual payments to or receipts from related parties occurred.
33. Which of the following procedures would an auditor most likely perform in auditing the statement
of cash flows?
A. Compare the amounts included in the statement of cash flows to similar amounts in the prior
year’s statement of cash flows.
B. Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balances.
C. Vouch all bank transfers for the last week of the year and first week of the subsequent year.
D. Reconcile the amounts included in the statement of cash flows to the other financial
statements’ balances and amounts.
34. To gain assurance that all inventory items in a client’s inventory listing schedule are valid, an
auditor most likely would vouch
A. Inventory tags noted during the auditor’s observation to items listed in the inventory listing
schedule.
B. Inventory tags noted during the auditor’s observation to items listed in the receiving reports and
vendors’ invoices.
C. Items listed in the inventory listing schedule to inventory tags and the auditor’s recorded
count sheets.
D. Items listed in receiving reports and vendors’ invoices to the inventory listing schedule.
35. An auditor selected items for test counts while observing a client’s physical inventory. The auditor
then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence
concerning management’s assertion of
36. While observing a client’s annual physical inventory, an auditor recorded test counts for several
items and noticed that certain test counts were higher than the recorded quantities in the client’s
perpetual records. This situation could be the result of the client’s failure to record
A. Purchase discounts C. Sales
B. Purchase returns D. Sales returns
37. The primary source of information to be reported about litigation, claims, and assessments is
the
A. Client’s lawyer C. Client’s management
B. Court records D. Independent auditor
38. Which of the following is an audit procedure that an auditor most likely would perform
concerning litigation, claims, and assessments?
A. Requests the client’s lawyer to evaluate whether the client’s pending litigation, claims, and
assessments indicate a going concern problem.
B. Examine the legal documents in the client’s lawyer’s possession concerning litigation, claims,
and assessment to which the lawyer has devoted substantive attention.
C. Discuss with management its policies and procedures adopted for evaluating and
accounting for litigation, claims, and assessments.
D. Confirm directly with the client’s lawyer that all litigation, claims, and assessments have been
recorded or disclosed in the financial statements.
39. Which of the following is not an audit procedure that the independent auditor would perform with
respect to litigation, claims, and assessments?
A. Inquire of and discuss with management the policies and procedures adopted for litigation,
claims, and assertions.
B. Obtain from management a description and evaluation of litigation, claims, and assessments that
existed at the balance sheet date.
C. Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has
advised are probable of assertion and must be disclosed.
D. Confirm directly with the client’s lawyer that all claims have been recorded in the financial
statements.
41. The auditor should complete the assembly of the final audit file on a timely basis after the date of
the auditor’s report. As PSQC 1 indicates, _____ days after the date of the auditor’s report is ordinarily
an appropriate time limit within which to complete the assembly of the final audit file.
A. 30 C. 60
B. 90 D. 120
42. After the assembly of the final audit file has been completed, the auditor should not delete or
discard audit documentation before the end of its retention period. As PSQC 1 indicates, the retention
period for audit engagements ordinarily is no shorter than _____ years from the date of the auditor’s
report.
A. 5 C. 3
B. 7 D. 10
43. In documenting the nature, timing and extent of audit procedures performed, the auditor
should record
I. Who performed the audit work and the date such work was completed.
II. Who reviewed the audit work and the date and extent of such review.
44. The permanent (continuing) file of an auditor’s working papers most likely would include copies of
the
A. Lead schedules C. Bank statements
B. Attorneys’ letters D. Debt agreements
45. The current file of an auditor’s working papers most likely would include copy of the
A. Bank reconciliation C. Articles of incorporation
B. Pension plan contract D. Flowchart of the internal control activities
PSA 240 (revised 2005) The Auditor’s Responsibility to Consider Fraud in an Audit of
Financial Statements
1. Misstatements in the financial statements can arise from fraud or error. The distinguishing
factor between fraud and error is whether the underlying action that results in the misstatement of the
financial statements is
I Intentional or unintentional
II Rational or irrational
2. ”Error” includes
A. Engaging in complex transactions that are structured to misrepresent the financial position or
financial performance of the entity.
B. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial
statements.
C. An incorrect accounting estimate arising from oversight or misinterpretation of facts.
D. Intentional misapplication of accounting policies relating to amounts, classification, manner of
presentation, or disclosure.
3. Fraud involving one or more members of management or those charged with governance is referred
to as
A. Management fraud C. Fraudulent financial reporting.
B. Employee fraud. D. Misappropriation of assets.
4. The auditor is concerned with fraud that causes a material misstatement in the financial statements.
There are two types of intentional misstatements that are relevant to the auditor: misstatements resulting
from fraudulent financial reporting and misstatements resulting from
A. Management fraud.
B. Employee fraud.
C. Misappropriation of assets.
D. Collusion within the entity or with third parties.
A. I and II only.
B. II and III only.
C. I and III only
D. I, II, and III
7. The primary responsibility for the prevention and detection of fraud rests with
A. Those charged with governance of the entity.
B. Management of the entity.
C. Both those charged with governance of the entity and management.
D. The auditor.
10. The following are examples of fraud risk factors relating to misstatements arising from
misappropriation of assets, except
A. Recurring negative cash flows from operating activities while reporting earnings and
earnings growth.
B. Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
C. Inadequate segregation of duties or independent checks.
D. Adverse relationship between the entity and employees with access to cash or other assets
susceptible to theft created by recent changes made to employee compensation or benefit plans.
12. Which of the following conditions or events may create incentives/pressures to commit fraud?
A. Inadequate system of authorization and approval of transactions.
B. Lack of mandatory vacations for employees performing key control functions.
C. Excessive pressure on management or operating personnel to meet financial targets
established by those charged with governance, including sales or profitability incentive
goals.
D. Inadequate access controls over automated records.
13. Because of the risk of material misstatement, an audit of financial statements in accordance with
PSAs should be planned and performed with an attitude of
A. Impartial conservatism.
B. Objective judgment.
C. Independent integrity.
D. Professional skepticism.
14. When planning the audit, the auditor should make inquiries of management. Such inquiries should
address the following, except
A. Management’s assessment of the risk that the financial statements maybe misstated due to fraud.
B. Management’s process for identifying and responding to the risks of fraud in the entity.
C. Management’s consideration of how an element of unpredictability will be incorporated
into the nature, timing, and extent of the audit procedures to be performed.
D. Management’s communication, if any, to those charged with governance regarding its processes
for identifying and responding to the risks of fraud in the entity.
15. When the auditor identifies a misstatement in the financial statements, the auditor should consider
whether such a misstatement may be indicative of fraud and if there is such an indication, the auditor
should
A. Consider the implications of the misstatements in relation to other aspects of the audit.
B. Withdraw from the engagement.
C. Communicate the information to regulatory and enforcement authorities.
D. Report the matter to the person or persons who made the audit appointment.
16. PSA 230 (Documentation) requires the auditor to document matters which are important in
providing evidence to support the audit opinion, and states that the working papers include the auditor’s
reasoning on all significant matters which require the auditor’s judgment, together with the auditor’s
conclusion thereon. Which of the following should be documented by the auditor?
A. Fraud risk factors identified as being present during the auditor’s risk assessment process.
B. Auditor’s responses to identified fraud risk factors.
C. Both fraud risk factors identified as being present during the auditor’s risk assessment
process and the auditor’s response to any such factors.
D. The standard does not require documentation of the identified fraud risk factors and the auditor’s
responses to them.
17. The following statements relate to communication of misstatements resulting from fraud to
management and to those charged with governance. Which is false?
A. The auditor need not bring to the attention of those charged with governance any material
weaknesses in internal control related to the prevention and detection of fraud.
B. If the auditor has identified a fraud, whether or not it results in a material misstatement in the
financial statements, the auditor should communicate these matters to the appropriate level of
management on a timely basis, and consider the need to report such matters to those charged
with governance.
C. If the auditor has obtained evidence that indicates that fraud may exist (even if the potential
effect on the financial statements would not be material), the auditor should communicate these
matters to the appropriate level of management on a timely basis, and consider the need to report
such matters to those charged with governance.
D. The auditor’s communication with those charged with governance may be made orally or in
writing.
18. As used in PSA 250 (Consideration of Laws and Regulations in an Audit of Financial Statements),
this term refers to acts of omission or commission by the entity being audited, either intentional or
unintentional, which are contrary to prevailing laws or regulations.
A. Noncompliance C. Erotic acts
B. Illegal acts D. Unforgivable acts
19. According to PSA 250, the term “noncompliance” as used in the standard refers to acts of omission
or commission by the entity being audited, either intentional or unintentional, which are contrary to the
prevailing laws or regulations. Such acts do not include
A. Transactions entered into by the entity.
B. Transactions entered into in the name of the entity.
C. Transactions entered into on the entity’s behalf by its management or employees.
D. Personal misconduct (unrelated to the entity’s business activities) by the entity’s
management or employees.
20. The responsibility for the prevention and detection of noncompliance rests with
A. The auditor. C. The auditor’s lawyer.
B. Management. D. The client’s lawyer.
21.
22.
23. 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, the auditor should express
A. A qualified or an adverse opinion.
B. A qualified opinion or a disclaimer of opinion.
C. An adverse opinion
D. An adverse opinion or a disclaimer of opinion
24. If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to
evaluate whether noncompliance that may be material to the financial statements, has, or is likely to
have, occurred, the auditor should express
A. A qualified or an adverse opinion.
B. A qualified opinion or a disclaimer of opinion.
C. An adverse opinion
D. An adverse opinion or a disclaimer of opinion.
25.
26. Under PSA 260, this term is used to describe the role of persons entrusted with the supervision,
control, and direction of an entity.
A. Oversight C. Direction
B. Governance D. Control
27. Under PSA 260, those matters that arise from the audit of financial statements and, in the opinion of
the auditor, are both important and relevant to those charged with governance in overseeing the financial
reporting and disclosure process are called
A. Audit matters of governance interest.
B. Significant audit matters.
C. Auditor’s findings
D. Material misstatements in the financial statements.
28. Which of the following statements relating to communication of audit matters of governance interest
is incorrect?
A. Audit matters of governance interest include only those matters that have come to the attention
of the auditor as a result of the performance of the audit.
B. In an audit in accordance with PSAs, the auditor should design audit procedures for the
specific purpose of identifying matters of governance interest.
C. The auditor should identify relevant persons who are charged with governance and with whom
audit matters of governance interest are to be communicated.
D. The auditor’s communication with those charged with governance may be made orally or in
writing.
29. Audit matters of governance interest to be communicated to those charged with governance
ordinarily include
A. Audit adjustments, whether or not recorded by the entity that have. Or could have, a material
effect on its financial statements.
B. Expected modifications to the auditor’s report.
C. Material uncertainties related to events and conditions that may cast significant doubt on the
entity’s ability to continue as a going concern.
D. All of the above.
30. PSA 260 requires the auditor to determine the relevant persons who are charged with governance
and with whom audit matters of governance interest are communicated. For corporations covered by the
SEC Code of Corporate Governance, which of the following is primarily responsible for corporate
governance?
A. President C. Board of Directors
B. Controller D. Management
3. Which of the following statements best explains why accountancy profession has found it essential to
promulgate ethical standards and to establish means for ensuring their observance?
A. A professional accountant’s primary responsibility is to satisfy the needs of an individual client
or employer.
B. A distinguishing mark of a profession is acceptance of its responsibility to the public.
C. Strict implementation and enforcement of ethical requirements is the best way to prevent
unscrupulous acts.
D. Ethical standards that emphasize excellence in performance over material rewards establish
reputation for competence and character.
5. In order to achieve the objectives of the accountancy profession, professional accountants have to
observe a number of prerequisites or fundamental principles. Which of the following fundamental
principles requires a professional accountant to be straightforward and honest in performing
professional services?
A. Confidentiality C. Objectivity
B. Integrity D. Professional competence and due care
7. The following statements relate to the professional accountant’s obligation to respect the
confidentiality of information about a client’s or an employer’s affairs acquired in the course of
professional services. Which is false?
A. The duty of confidentiality continues even after the end of the relationship between the
professional accountant and the client or employer.
B. Confidentiality should always be observed by a professional accountant unless specific authority
has been given to disclose information or there is a legal or professional duty to disclose.
C. When authorization to disclose confidential information is given by the client or the
employer, third parties’ interests that might be affected need not be considered.
D. A professional accountant may disclose confidential information to protect his/her professional
interests in legal proceedings.
14. To ensure that independence of mind and independence in appearance are not compromised,
members of the assurance teams, firms, and network firms should
I. Identify threats to independence.
II. Evaluate the significance of identified threats to independence.
III. If the threats are other than clearly insignificant, identify and apply safeguards to
eliminate the threats or reduce them to an acceptable level.
15. Which of the following independence requirements for assurance engagements is incorrect?
A. For an audit engagement, the members of the assurance team, the firm, and network firms are
required to be independent of the client.
B. For a non-audit assurance engagement, when the report is not expressly restricted for use
by identified users, the members of the assurance team, the firm, and network firms are
required to be independent of the client.
C. For a non-audit assurance engagement, when the report is not expressly restricted for use by
identified users, the members of the assurance team and the firm are required to be independent
of the client.
D. For a non-audit assurance engagement, when the report is expressly restricted for use by
identified users, the members of the assurance team are required to be independent of the client
and the firm should not have a material direct or indirect financial interest in the client.
23. Safeguards created by the profession, legislation or regulation include the following, except
A. Educational, training, and experience requirements for entry into the profession.
B. When the assurance client’s management appoints the firm, persons other than
management ratify or approve the appointment.
C. Continuing Professional Education (CPE) requirements.
D. Professional standards and monitoring and disciplinary processes.
60. Which of the following is NOT a factor to consider in determining the professional fee of a
professional accountant in public practice?
A. The skill and knowledge required for the type of professional services involved.
B. The result of the assurance work.
C. The level of training and experience of the persons necessarily engaged in performing the
professional services.
D. The time necessarily occupied by each person engaged in performing the professional services.
62. The following actions should be taken by a professional accountant in public practice entrusted with
clients’ money, except
A. Keep such money separately from personal or firm money.
B. When it seems likely that the client’s money will remain on client account for a significant
period of time, place such money in an interest-bearing account within a reasonable time,
even without the client’s concurrence.
C. Use such money only for the purpose for which it is intended.
D. At all times, be ready to account for the money to any person entitled to such accounting.
63. The communication to the public of facts about a professional accountant which are not designed
for the deliberate promotion of that professional accountant is
A. Advertising C. Promotion.
B. Solicitation D. Publicity.
2. Which of the following is NOT an objective of the Philippine Accountancy Act of 2004?
A. The standardization and regulation of accounting education.
B. The examination for registration of certified public accountants.
C. The supervision, control, and regulation of the practice of accountancy in the Philippines.
D. The development and improvement of accounting standards that will be generally accepted
in the Philippines.
6. The members of the Professional Regulatory Board of Accountancy shall be appointed by the
A. Philippine Institute of CPAs (PICPA)
B. Professional Regulation Commission (PRC)
C. President of the Philippines.
D. Association of CPAs in Public Practice (ACPAPP)
9. The following statements relate to the term of office of the chairman and members of the Board of
Accountancy (BOA). Which is false?
A. The chairman and members of the BOA shall hold office for a term of three (3).
B. Any vacancy occurring within the term of a member shall be filled up for the unexpired portion
of the term only.
C. No person who has served two successive complete terms as chairman or member shall be
eligible for reappointment until the lapse of two (2) years.
D. Appointment to fill up an unexpired term is not to be considered as a complete term.
10. The Board of Accountancy has the power to conduct an oversight into the quality of audits of
financial statements through a review of the quality control measures instituted by auditors in order to
ensure compliance with the accounting and auditing standards and practices. This power of the BOA is
called
A. Quality review C. Appraisal
B. Peer review D. Quality control.
14. Which of the following is not a qualification of an applicant for the CPA licensure examination?
A. He/she is a Filipino citizen.
B. He/she is of good moral character.
C. He/she is at least 21 years of age.
D. He/she is a holder of the degree of Bachelor of Science in Accountancy.
20. The following statements relate to the practice of public accountancy. Which statement is
incorrect?
A. Single practitioners and partners of partnerships organized for the practice of public accountancy
shall be registered CPAs in the Philippines.
B. From the effectivity of RA 9298, a Certificate of Accreditation shall be issued to CPAs in
public practice only upon showing, in accordance with rules and regulations promulgated
by the Board and approved by the PRC, that such registrant has acquired a minimum of
two(2) years meaningful experience in any of the areas of public practice including
taxation.
C. A partnership engaged in the practice of public accountancy may be carried on in the form of a
general partnership (GP) or a limited liability partnership (LLP) organized in accordance with
Philippine laws.
D. The Securities Commission shall not register any corporation organized for the practice of public
accountancy.
21. Which of the following statements concerning ownership of working papers is incorrect?
A. All working papers made by a CPA and his/her staff in the course of an examination remain the
property of such CPA in the absence of a written agreement between the CPA and the client to
the contrary.
B. Working papers include schedules and memoranda prepared and submitted by the client to the
CPA.
C. Working papers include reports submitted by a CPA to his/her client.
D. Working papers shall be treated confidential and privileged unless such documents are required
to be produce through subpoena issued by any court, tribunal, or government regulatory or
administrative body.
22. The following statements relate to the use of seal by registered CPAs. Which is incorrect?
A. A registered CPA shall obtain and use a seal of a design that will suit his/her taste.
B. The seal should be of a design prescribed by the Board bearing the CPA’s name, registration
number, and title.
C. The auditor’s reports shall be stamped with the CPA’s seal, indicating therein his/her current
Professional Tax Receipt (PTR) number, date/place of payment when filed with government
authorities or when used professionally.
D. The seal of a CPA shall be circular in form.
23. A special/temporary permit may be issued by the Board of Accountancy (BOA) to the following
persons, except
A. A foreign CPA called for consultation or for a specific purpose which, in the judgment of
the BOA, is essential for the development of the country regardless of whether there are
Filipino CPAs who are qualified for such consultation or specific purpose.
B. A foreign CPA engaged as a professor, lecturer or critic in fields essential to accountancy
education in the Philippines and his/her engagement is confined to teaching only.
C. A foreign CPA who is an internationally recognized expert or with specialization in any branch
of accountancy and his/her service is essential for the advancement of accountancy in the
Philippines.
D. A foreign CPA called for consultation or for a specific purpose which, in the judgment of the
BOA, is essential for the development of the country and that there is no Filipino CPA qualified
for such consultation or specific purpose.
24. Any person who shall violate any of the provisions of the Accountancy Act or any of its
implementing rules and regulations promulgated by the Board of Accountancy subject to the approval of
the PRC, shall, upon conviction, be punished by
A. A fine of not more than P50,000.
B. Imprisonment for a period not exceeding two years.
C. A fine of not less than P50,000 or by imprisonment for a period not exceeding two years or
both.
D. Lethal injection.
25. Which of the following is the accredited national professional organization of CPAs (APO)?
A. PICPA C. AASB
B. ASC D. FRSC
29. As defined in Annex “C” of the IRR, this refers to the inculcation, assimilation and acquisition of
knowledge, skills, proficiency and ethical and moral values, after the initial registration of a professional
that raise and enhance the professional’s technical skills and competence.
A. Professional Development. C. Continuing Professional Development
B. Continuing Professional Education. D. Professional Growth and Development
30. The PRC CPE Council shall assist the BOA in implementing its CPE program. Which of the
following statements is incorrect concerning the Council’s composition?
A. The PRC CPE Council shall be composed of a chairperson and two (2) members.
B. The chairperson shall be chosen from among the members of the BOA by the PRC.
C. The first member shall be the president or, in his/her absence or incapacity, any officer chosen by
the Board of Directors of PICPA.
D. The second member shall be the president, or in his/her absence or incapacity, any officer of the
organization of deans or department heads of schools, colleges or universities offering the degree
requiring licensure examination.
33. Which of the following statements concerning a CPA’s disclosure of confidential client information
is ordinarily correct?
A. Disclosure may be made to any party on consent of the client.
B. Disclosure should not be made even if such disclosure will protect the CPA’s professional
interests in legal proceedings.
C. Disclosure should be made only if there is a legal or professional duty to make the disclosure.
D. Disclosure maybe made to any government agency without subpoena.
AUDIT SAMPLING
PSA 530
1.In designing audit procedures, the auditor is required to determine appropriate means of selecting
items for testing to gather audit evidence. Which of the following means is/are available to the auditor?
I. Selecting all items (100% examination)
II. Selecting specific items.
III.Audit sampling
2. Which of the following should be considered by the auditor in deciding which means ( or
combination of means) to use in selecting items for testing?
I. The risk of material misstatement related to the assertion being tested.
II. Audit efficiency.
3. It will be appropriate to audit all the items that make up a class of transactions or account balance
(100% examination), except
A. When the class of transactions or account balance consists of a large number of small value
items.
B. When the class of transactions or account balance consists of a small number of large value
items.
C. When there is a significant risk of misstatement and other selection methods do not provide
sufficient appropriate audit evidence.
D. When the repetitive nature of a calculation or other process performed automatically by the
client’s computer information system (CIS) makes a 100% examination effective.
5. Population, as defined in PSA 530, means the entire set of data from which a sample is selected and
about which the auditor wishes to draw conclusions. It is important for the auditor to ensure that the
population is
I. Appropriate to the objective of the audit procedure.
II. Complete.
A. I only C. Both I and II only
B. II only D. Neither I nor II
6. An advantage of statistical over nonstatistical sampling methods in tests of controls is that in
statistical methods
A. Afford greater assurance than a nonstatistical sample of equal size.
B. Provide an objective basis for quantitatively evaluating sampling risks.
C. Can more easily convert the sample into a dual-purpose test useful for substantive testing.
D. Eliminate the need to use judgment in determining appropriate sample sizes.
7. The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the
A. Effectiveness of the audit. C. Preliminary estimates of materiality levels.
B. Efficiency of the audit. D. Tolerable misstatement.
8. The likelihood of assessing control risk too high is the risk that the sample selected to test controls
A. Does not support the auditor’s planned assessed level of control risk when the true
operating effectiveness of internal control justifies such an assessment.
B. Contains misstatements that could be material to the financial statements when aggregated with
misstatements in other account balances of transactions classes.
C. Contains proportionately fewer deviations from prescribed internal controls than exist in the
balance or class as a whole.
D. Does not support the tolerable misstatement for some or all of management’s assertions.
9. While performing a test of details during an audit, the auditor determined that the sample results
supported the conclusion that the recorded account balance was materially misstated. It was in fact, not
materially misstated. This situation illustrates the risk of
A. Incorrect rejection C. Assessing control risk too low.
B. Incorrect acceptance D. assessing control risk too high.
10. Which of the following sample planning factors would influence the sample size for a substantive
test of details for a specific account?
12. 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.
13. Which of the following statistical selection techniques is least desirable for use by an auditor?
A. Systematic selection C. Block selection
B. Stratified selection D. Sequential selection
14. The expected population deviation rate of client billing errors is 3%. The auditor has established a
tolerable rate of 5%. In the review of client invoices the auditor should use
A. Stratified sampling C. Discovery sampling
B. Variable sampling D. Attribute sampling
15. Which of the following sampling methods would be used to estimate a numerical measurement of a
population, such as peso value?
A. Attributes sampling C. Variable sampling
B. Stop-or-go sampling D. Random-number sampling
16. Which of the following statements is correct concerning statistical sampling in tests of controls?
A. Deviations from control procedures at a given rate usually result in misstatements at a higher
rate.
B. As the population size doubles, the sample should also double.
C. The quantitative aspects of deviations are not considered by the auditor.
D. There is an inverse relationship between the sample size and the tolerable rate.
17. Which of the following statistical sampling plans does not use a fixed sample size for tests of
controls?
A. Attributes sampling C. PPS sampling
B. Sequential sampling D. Variables sampling
19. When performing a test of a control with respect to control over cash receipts, an auditor may use a
systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of
this type of sampling is that the items in the population
A. Must be systematically replaced in the population after sampling.
B. Must systematically occur more than once in the sample.
C. Must be recorded in a systematic pattern before the sample can be drawn.
D. May occur in a systematic pattern, thus destroying the sample randomness.
20. Which of the following combinations results in a decrease in a sample size for attributes?
Risk of assessing control risk too low Tolerable rate Expected population deviation rate
A. Increase Decrease Increase
B. Decrease Increase Decrease
C. Increase Increase Decrease
D. Increase Increase Increase
21. An auditor is testing internal control procedures that are evidenced on an entity’s vouchers by
matching random numbers. If a random number matches the number of a voided voucher, that voucher
ordinarily should be replaced by another voucher in the random sample if the voucher
A. Constitutes a deviation.
B. Has been properly voided.
C. Cannot be located.
D. Represents an immaterial peso amount.
22. An auditor plans to examine a sample of 20 purchase orders for proper approvals as prescribed by
the client’s internal control procedures. One of the purchase orders in the chosen sample cannot be
found, and the auditor is unable to use alternative procedures to test whether that purchase was properly
approved. The auditor should
A. Choose another purchase order to replace the missing purchase order in the sample.
B. Consider this test of sample invalid and proceed with substantive tests since internal control can
not be relied upon.
C. Treat the missing purchase order as a deviation for the purpose of evaluating the sample.
D. Select a completely new set of 20 purchase orders.
23. The tolerable rate of deviations for a test of a control is generally
A. Lower than the expected rate of errors in the related accounting records.
B. Higher than the expected rate of errors in the related accounting records.
C. Identical to the expected rate of errors in the related accounting records.
D. Unrelated to the expected rate of errors in the related accounting records.
24.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 C. Random sampling
B. Variables sampling D. PPS sampling
25. Which of the following courses of action would an auditor most likely follow in planning a sample
of cash disbursements if the auditor is aware of several unusually large cash disbursement?
A. Set the tolerable rate of deviation at a lower level than originally planned.
B. Stratify the cash disbursements population so that the unusually large disbursements are
selected.
C. Increase the sample size to reduce the effect of the unusually large disbursements.
D. Continue to draw new samples until all the unusually large disbursements appear in the sample.
26. While performing a test of details during an audit, an auditor determined that the sample results
supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not
materially misstated. This situation illustrates the risk of
A. Assessing control risk too high.
B. Assessing control risk too low.
C. Incorrect rejection
D. Incorrect acceptance.
27.Use of the ratio estimation sampling technique to estimated peso amounts is inappropriate when
A. The total book value is known and corresponds to the sum of all the individual book values.
B. A book value for each sample item is unknown.
C. There are some observed differences between audited values and book values.
D. The audited values are nearly proportional to the book values.
28. For which of the following audit tests would an auditor most likely use attribute sampling?
A. Making an independent estimate of the amount of 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.
1.Analytical procedures used in the overall review stage of the audit generally include
A. Retesting controls that appeared to be ineffective during the assessment of control risk.
B. Considering unusual or unexpected account balances that were not previously identified.
C. Gathering evidence concerning account balances that have not changed from the prior year.
D. Performing tests of transactions to corroborate management’s financial statement assertions.
2. Analytical procedures performed in the overall review stage of an audit suggest that several accounts
have unexpected relationships. The results of these procedures most likely indicate that
A. The communication with the audit committee should be revised.
B. Irregularities exist among the relevant account balances.
C. Additional substantive tests of details are required.
D. Internal control activities are not operating effectively.
3. the responsibility for the identification and disclosure of related parties and transactions with such
parties rests with the
A. Auditor
B. Entity’s management
C. Financial Reporting Standards Council (FRSC)
D. Securities and Exchange Commission (SEC).
4. The auditor should review information provide by those charged with governance and management
identifying
I. The names of all known related parties.
II. Related party transactions.
5. Which of the following events most likely indicates the existence of related parties?
A. Making a loan without scheduled terms of repayment of the funds.
B. Discussing merger terms with a company that is a major competitor.
C. Selling real estate at a price that differs significantly from its book value.
D. Borrowing a large sum of money at a variable rate of interest.
6. An auditor searching for related party transactions should obtain understanding of each subsidiary’s
relationship to the total entity because
A. This permit the audit of intercompany account balances to be performed as of the concurrent
dates.
B. This may reveal whether particular transactions would have taken place if the parties had not
been related.
C. The business structure may be deliberately designed to obscure related party transactions.
D. Intercompany transactions may have been consummated on terms of equivalent to arm’s-length
transactions.
7. After determining that a related party transactions has, in fact, occurred, an auditor should
A. Obtain an understanding of the business purpose of the transaction.
B. Substantiate that the transaction was consummated on terms equivalent to an arm’s-length
transaction.
C. Add a separate paragraph to the auditor’s report to explain the transaction.
D. Perform analytical procedures to verify whether similar transactions occurred, but were not
recorded.
8. As used in PSA 560 (Subsequent Events), the term “subsequent events” refers to
I. Events occurring between the date of the financial statements and the date of the auditor’s
report.
II. Facts discovered after the date of the auditor’s report.
9. Which of the following statements best describes the “date of the financial statements”?
A. The date on which those with the recognized authority assert that they have prepared the entity’s
complete set of financial statements, including the related notes, and that they have taken
responsibility for them.
B. The date that the auditor’s report and audited financial statements are made available to third
parties.
C. The date of the end of the latest period covered by the financial statements, which is
normally the date of the most recent balance sheet in the financial statements subject to
audit.
D. The date on which the auditor has obtained sufficient appropriate audit evidence on which to
base the opinion on the financial statements.
10. Which of the following procedures would an auditor most likely to perform to obtain evidence about
the occurrence of subsequent events?
A. Inquiring as to whether any unusual adjustments were made after the date of the financial
statements.
B. Confirming a sample of material accounts receivable established after the date of the financial
statements.
C. Comparing the financial statements being reported on with those of the prior period.
D. Investigating personnel changes in the accounting department occurring after the date of the
financial statements.
11. Which of the following statements best expresses the auditor’s responsibility with respect to facts
discovered after the date of the audio’s report but before the date the financial statements are issued?
A. The auditor should amend the financial statements.
B. If the facts discovered will materially affect the financial statements, the auditor should issue a
new report which contains either a qualified opinion or an adverse opinion.
C. The auditor should consider whether the financial statements need amendment, discuss the
matter with management, and consider taking actions appropriate in the circumstances.
D. The auditor should withdraw from the engagement.
12. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other
procedures concerning the audited financial statements, unless
A. Final determinations or resolutions are made of contingencies that had been disclosed in the
financial statements.
B. Information about an event that occurred after the date of the auditor’s report comes to the
auditor’s attention.
C. The control environment changes after the issuance of the report.
D. Information, which existed at the report date and may affect the report, comes to the
auditor’s attention.
13. Which of the following events occurring after the issuance of an auditor’s report most likely would
cause the auditor to make further inquiries about the previously issued financial statements?
A. A technological development that could affect the entity’s future ability to continue as a going
concern.
B. The entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated sales.
C. The discovery of information regarding a contingency that existed before the financial
statements were issued.
D. The final resolution of a lawsuit disclosed in the notes to the financial statements.
14. PSA 570 (Going Concern) states that a fundamental principle in the preparation of financial
statements is the going concern assumption. Under this assumption, an entity is ordinarily viewed as
continuing in business for the foreseeable future with neither the intention nor the necessity of
liquidation, ceasing trading or seeking protection from creditors pursuant to laws and regulations. The
responsibility to make an assessment of an entity’s ability to continue as a going concern rests with the
A. Auditor C. SEC
B. Entity’s management D. Entity’s creditors
15. Which of the following statements best describes the auditor’s responsibility concerning the
appropriateness of the going concern assumption in the preparation of the financial statements?
A. The auditor’s responsibility is to make a specific assessment of the entity’s ability to continue as
a going concern.
B. The auditor’s responsibility is to predict future events or conditions that may cause the entity to
cease to continue as a going concern.
C. The auditor’s responsibility is to consider the appropriateness of management’s use of the
going concern assumption and consider whether there are material uncertainties about the
entity’s ability to continue as a going concern that need to be disclosed in the financial
statements.
D. The auditor’s responsibility is to give a guarantee in the audit report that the entity has the ability
to continue as a going concern.
16. Which of the following conditions or events most likely would cause an auditor to have substantial
doubt about an entity’s ability to continue as a going concern?
A. Cash flows from operating activities are negative.
B. Stock dividends replace annual cash dividends.
C. Significant related party transactions are pervasive.
D. Arrearages in principal stock dividends are paid.
17. Which of the following conditions or events most likely would cause an auditor to have substantial
doubt about an entity’s ability to continue as a going concern?
A. Restrictions on the disposal of principal assets are present.
B. Usual trade credit from suppliers is denied.
C. Significant related party transactions are pervasive.
D. Arrearages in principal stock dividends are paid.
18. Which of the following audit procedures would most likely assist an auditor in identifying conditions
and events that may indicate there could be substantial doubt an entity’s ability to continue as a going
concern?
A. Confirmation of bank balances.
B. Confirmation of accounts receivable from major customers.
C. Reconciliation of interest expense with debt outstanding.
D. Review of compliance with terms of debt agreements.
20. When an auditor concludes that there is substantial doubt about a continuing audit client’s ability to
continue as a going concern for a reasonable period of time, the auditor’s responsibility is to
A. Consider the adequacy of disclosure about the client’s possible inability to continue as a
going concern.
B. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on
the financial statements.
C. Report to the client’s audit committee that management’s accounting estimates may need to be
adjusted.
D. Reissue the prior year’s auditor’s report and add an emphasis of matter paragraph that
specifically refers to “substantial doubt” and “ going concern”.
21. Under PSA 580 (Management Representation), the auditor is required to obtain audit evidence that
management
I. Acknowledges its responsibility for the fair presentation of the financial statements in
accordance with applicable financial reporting framework.
II. Has approved the financial statements.
23. When considering the use of management’s written representations as audit evidence about the
completeness assertion, an auditor should understand that such representations
A. Constitute sufficient appropriate audit evidence to support the assertion when considered in
combination with a sufficiently low assessed level of control risk.
B. Are not part of the audit evidence considered to support the assertion.
C. Replace a low assessed level of control risk as audit evidence to support the assertion.
D. Complement, but do not replace, substantive tests designed to support the assertion.
24. A written representation from a client’s management that, among other matters, acknowledges
responsibility for the fair presentation of financial statements, should normally be signed by the
A. Chief financial officer and the chair of the board of directors.
B. Chief executive officer and the chief financial officer.
C. Chief executive officer, the chair of the board of directors, and the client’s lawyer.
D. Chair of the audit committee of the board of directors.
25.The date of the management representation letter should coincide with the date of the
A. Balance sheet
B. Latest related party transaction
C. Auditor’s report
D. Latest interim financial information
27. What type of opinion should be expressed if the client’s management refuses to provide a
representation that the auditor considers necessary?
A. Qualified opinion or a disclaimer of opinion
B. Qualified opinion or an adverse opinion.
C. Adverse opinion or a disclaimer of opinion.
D. Unqualified opinion.
28. The primary source of information to be reported about litigation, claims and assessments is the
A. Independent auditor C. Court records
B. Client’s management D. Client’s lawyer
29. The primary reason an auditor requests that letters of inquiry be sent to a client’s attorneys is to
provide the auditor with
A. A description and evaluation of litigation, claims and assessments that existed at the balance
sheet date.
B. The attorney’s opinions of the client’s historical experiences in recent similar litigation.
C. Corroboration of the information furnished by management about litigation, claims and
assessments.
D. The probable outcome of asserted claims and pending or threatened litigation.
31. The refusal by the client’s lawyer to provide a representation on the legality of a particular act
committed by the client is ordinarily
A. Proper grounds to withdraw from the engagement.
B. Insufficient reason to modify the auditor’s report because of the lawyer’s obligation of
confidentiality.
C. Considered to be a scope limitation.
D. Sufficient reason to issue a “subject to” opinion.
32. Management’s refusal to give the auditor permission to communicate with the entity’s legal counsel
is most likely to lead to
A. An adverse opinion
B. A qualified opinion or an adverse opinion
C. An unqualified opinion
D. A qualified opinion or a disclaimer of opinion
33. In which of the following circumstances would an auditor most likely meet with the client’s legal
counsel to discuss the likely outcome of the litigation and claims?
35. The auditor should consider the status of legal matters up to the
A. Balance sheet date.
B. Date of the auditor’s report.
C. Date of approval of the financial statements.
D. Date of issuance of financial statements.
1.Financial statements of an entity that have been reviewed by an accountant should be accompanied by
a report stating that a review
A. Provides only limited assurance that the financial statements are fairly presented.
B. Includes examining, on a test basis, information that is the representation of management.
C. Consists principally of inquiries of company personnel and analytical procedures applied
to financial data.
D. Does not contemplate obtaining corroborating evidential matter or applying certain other
procedures ordinarily performed during an audit.
2.An accountant’s report on a review of the financial statements of an entity should state that the
accountant
A. Does not express an opinion or any form of limited assurance on the financial statements.
B. Conducted the review in accordance with the Philippine Standard on Review Engagements.
C. Obtained reasonable assurance about whether the financial statements are free of material
misstatements.
D. Examined evidence, on a test basis, supporting the amounts and disclosures in the financial
statements.
3. Financial statements of an entity that have been reviewed by an accountant should be accompanied
by a report stating that
A. The scope of the inquiry and analytical procedures performed by the accountant has not been
restricted.
B. The financial statements are the responsibility of the company’s management.
C. A review includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.
D. A review is greater in scope than a compilation, the objective of which is to present financial
statements that are free of material misstatements.
4. An accountant who reviews the financial statements of an entity should issue a report stating that a
review
A. Provides less assurance than an audit.
B. Provides negative assurance that internal control is functioning as designed.
C. Provides only limited assurance that the financial statements are fairly presented.
D. Is substantially more in scope than a compilation.
7. Which of the following should not be included in an accountant’s report based upon the compilation
of an entity’s financial statements?
A. A statement that a compilation of the company’s financial statements was made in accordance
with the Philippine Standard on Related Services applicable to compilation engagements.
B. A statement that management is responsible for the financial statements.
C. A statement that the accountant has not audited or reviewed the statements.
D. A statement that the accountant does not express an opinion but provides only negative
assurance on the statements.
9. An accountant may accept an engagement to apply agreed-upon procedures that are not sufficient to
express an opinion on one or more specified accounts or items of a financial statement provided that
A. The accountant’s report does not enumerate the procedures performed.
B. The financial statements are prepared in accordance with a comprehensive basis of accounting
other than generally accepted accounting principles.
C. Distribution of the accountant’s report is restricted.
D. The accountant is also the entity’s consulting auditor.
10. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its
knowledge and belief, an entity’s expected financial position, results of operations, and cash flows. Such
prospective financial statements are known as
A. Proforma financial statements C. Partial presentations
B. Financial projections D. Financial forecasts
11. A financial forecast consists of prospective financial statements that present an entity’s expected
financial position, results of operations, and cash flows. A forecast
A. Is based on the most conservative estimates.
B. Present estimates given one or more hypothetical assumptions.
C. Unlike a projection, may contain a range.
D. Is based on assumptions reflecting conditions expected to exist and courses of action
expected to be taken.
12. When an accountant examines prospective financial statements, the accountant’s report should
include a separate paragraph that
A. Contains an opinion as to whether the prospective financial statements are properly
prepared on the basis of the assumption and are presented in accordance with generally
accepted accounting principles in the Philippines.
B. Provides an explanation of the differences between an examination and an audit.
C. States that the accountant is responsible for events and circumstances up to 1 year after the
report’s date.
D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the prospective
financial statements.
13. A prospective financial information prepared on the basis of assumptions as to future events which
management expects to take place and the actions management expects to take as of the date the
information is prepared (best-estimate assumptions) is known as
A. Forecast C. Projection
B. Hypothetical financial information D. Best-estimate projection
14. The following statements relate to the examination of prospective financial information. Which is
false?
A. The auditor should express an opinion as to whether the results shown in the prospective
financial information will be achieved.
B. Before accepting an engagement to examine prospective financial information, the auditor
should consider the intended use of the information.
C. The auditor should not accept, or should withdraw from, an engagement to examine prospective
financial information when the assumptions are clearly unrealistic.
D. When in the auditor’s judgment an appropriate level of satisfaction has been obtained, the
auditor is not precluded from expressing positive assurance regarding the assumptions.
15. Which of the following is a prospective financial information for general use upon which an
accountant may appropriately report?
A. Financial projection C. Proforma financial statements
B. Partial presentation D. Financial forecast
1.To distinguish it from reports that might be issued by others, such as by officers of the entity, the
board of directors, or from the reports of other auditors who may not have to abide by the same ethical
requirements as the independent auditor, the auditor’s report should have an appropriate
A. Addressee C. Signature
B. Title D. Opinion
3. Which of the following is included in the introductory or opening paragraph of the auditor’s report?
A. Identification of the financial statements audited, including the date of and period covered
by the financial statements.
B. A statement that the financial statements re the responsibility of the entity’s management.
C. A statement that the audit was conducted in accordance with Philippine Standards on Auditing.
D. A statement that the responsibility of the auditor is to express an opinion on the financial
statements based on the audit.
I. Identifies the applicable financial reporting framework on which the financial statements
are based.
II. Expresses an opinion on the financial statements.
5. The following statements relate to the date of the auditor’s report. Which is false?
A. The auditor should date the report as of the completion date of the audit.
B. The date of the auditor’s report should not be earlier than the date on which the financial
statements are signed or approved by management.
C. The date of the auditor’s report should not be later than the date on which the financial
statements are signed or approved by management.
D. The date of the auditor’s report should always be later than the date on which the financial
statements (i.e., the balance sheet date).
6. In which of the following circumstances would an auditor most likely add an emphasis of matter
paragraph to the auditor’s report while expressing an unqualified opinion?
A. There is substantial doubt about the entity’s ability to continue as a going concern.
B. Management’s estimates of the effects of future events are unreasonable.
C. No depreciation has been provided in the financial statements.
D. Certain transactions cannot be tested because of management’s records retention policy.
7. An auditor’s responsibility to express an opinion on the financial statements is
A. Implicitly represented in the auditor’s report.
B. Explicitly represented in the “Auditor’s Responsibility” paragraph of the auditor’s report.
C. Explicitly represented in the “Management’s Responsibility” paragraph of the auditor’s report.
D. Explicitly represented in the opinion paragraph of the auditor’s report.
8. Which paragraphs of an auditor’s report on financial statements should refer to Philippine Financial
Reporting Standards?
A. Introductory and Opinion.
B. Auditor’s Responsibility and Management’s Responsibility
C. Introductory and Auditor’s Responsibility.
D. Management’s Responsibility and Opinion.
9. An independent auditor discovers that a payroll supervisor of the company being audited has
misappropriated P50,000. The company’s total assets and income before tax are P70 million and P15
million, respectively. Assuming no other issues affect the report, the auditor’s report will most likely
contain a/an
A. Unqualified opinion C. Adverse opinion
B. Disclaimer of opinion D. Scope qualification
10. A note to the financial statements of the Prudent Bank indicates that all of the records relating to the
bank’s business operations are stored on magnetic disks, and that no emergency backup systems or
duplicate disks are stored because the bank and its auditors consider the occurrence of a catastrophe to
be remote. Based upon this note, the auditor’s report should express
A. A qualified opinion C. An adverse opinion
B. An unqualified opinion D. A “subject to” opinion
11. An auditor who uses the work of an expert may refer to and identify the expert in the auditor’s report
if the
A. Expert is employed by the entity.
B. Expert’s work provides the auditor greater assurance of reliability.
C. Auditor expresses a qualified opinion or an adverse opinion related to the work of the
expert.
D. Auditor indicates a division of responsibility related to the work of the expert.
12. When would an auditor refer to the work of an appraiser in the auditor’s report?
A. An adverse opinion is expressed based on a difference of opinion between the client and the
outside appraiser as to the value of certain assets.
B. A disclaimer of opinion is expressed because of a scope limitation imposed on the auditor by the
appraiser.
C. A qualified opinion is expressed because of a matter unrelated to the work of the appraiser.
D. An unqualified opinion is expressed and an emphasis of matter paragraph is added to disclose the
use of the appraiser’s work.
13. When two or more auditing firms participate in an audit, one firm should be the principal auditor. If
the principal auditor makes reference to another auditor in an audit that would otherwise result in an
unqualified opinion, the type of audit report issued should be
A. A disclaimer of opinion C. An unqualified opinion
B. A qualified opinion D. An adverse opinion
16. When audited financial statements are presented in a document (e.g., annual report) containing other
information, the auditor
A. Should read the other information to consider whether it is inconsistent with the audited
financial statements.
B. Has no responsibility for the other information because it is not part of the basic financial
statements.
C. Han an obligation to perform auditing procedures to corroborate the other information.
D. Is required to express a qualified opinion if the other information has a material misstatement of
fact.
17. An auditor concludes that there is a material inconsistency in the other information in an annual
report to shareholders containing audited financial statements. If the auditor concludes that the financial
statements do not require revision, but the client refuses to revise or eliminate the material
inconsistency, the auditor may
A. Disclaim an opinion on the financial statements after explaining the material inconsistency n an
emphasis of matter paragraph.
B. Revise the auditor’s report to include an emphasis of matter paragraph describing the
material inconsistency.
C. Express a qualified opinion after discussing the matter with the client’s directors.
D. Consider the matter closed because the other information is not in the audited statements.
18. PSA 720 states, “If, on reading the other information, the auditor identifies a material inconsistency,
the auditor should determine whether the audited financial statements or the other information needs to
be amended.” What type of opinion should be expressed if the client refuses to make the necessary
amendment in the financial statements?
A. Disclaimer of opinion.
B. Qualified opinion or disclaimer of opinion.
C. Unqualified opinion with an emphasis of matter paragraph describing the material inconsistency.
D. Qualified or adverse opinion.
19. An auditor may express a qualified opinion under which of the following circumstances?
20. Which of the following should be included in the opinion paragraph when an auditor expresses a
qualified opinion?
21. In which of the following situations would an auditor ordinarily choose between expressing a
qualified opinion or an adverse opinion?
A. The auditor wishes to emphasize an unusually important subsequent event.
B. The financial statements fail to disclose information that is required by Philippine
Financial Reporting Standards.
C. Events disclosed in the financial statements cause the auditor to have substantial doubt about the
entity’s ability to continue as a going concern.
D. The auditor did not observe the entity’s physical inventory and is unable to become satisfied as
to its balance by other auditing procedures.
22. Which of the following phrases would an auditor most likely include in the auditor’s report when
expressing a qualified opinion because of inadequate disclosure?
A. Do not present fairly in all material respects.
B. Except for the omission of the information included in the preceding paragraph.
C. With the foregoing explanation of these omitted procedures.
D. Subject to the departure from generally accepted accounting principles, as described above.
23. An auditor’s report includes the following statement: “In our opinion, because of the effects of the
matters discussed in the preceding paragraph, the financial statements do not present fairly, in all
material respects, the financial position of ABC Company as of December 31, 20X1, and of its financial
performance and its cash flows for the year then ended in accordance with Philippine Financial
Reporting Standards.” This auditor’s report contains a/an
A. Qualified opinion C. Disclaimer of opinion
B. Unqualified opinion D. Adverse opinion
24. An auditor should disclose the substantive reasons for expressing an adverse opinion in an emphasis
of matter paragraph
A. Following the opinion paragraph
B. Preceding the opinion paragraph
C. Following the introductory paragraph
D. Within the notes to the financial statements.
25. There are two broad financial reporting frameworks for comparatives: the corresponding figures and
the comparative financial statements. Which of the following statements is correct concerning these
reporting frameworks?
A. Under the corresponding figures framework, the corresponding figures for the prior
period(s) are integral part of the current period financial statements.
B. Under the corresponding figures framework, the corresponding figures for the prior period(s) are
considered separate financial statements.
C. Under the corresponding figures framework, the comparative financial statements figures for the
prior period(s) are intended to be read in conjunction with the amounts and other disclosures
relating to the current period.
D. Under the corresponding figures framework, the amounts and other disclosures for the prior
period(s) form part of the current period financial statements.
26. The following statements relate to the auditor’s reporting responsibilities regarding comparatives.
Which is incorrect?
I. For corresponding figures, the auditor’s report only refers to the financial statements of the
current period.
II.For comparative financial statements, the auditor’s report refers to each period that financial
statements are presented.
27. PSA 710 states that the extent of audit procedures performed on the corresponding figures is
significantly less than for the audit of the current period figures. The auditor’s procedures are ordinarily
limited to ensuring that the corresponding figures have been correctly reported and are appropriately
classified. The auditor should assess whether
I. Accounting policies used for the corresponding figures are consistent with those of the
current period or whether appropriate adjustments and/or disclosures have been made.
II.Correponding figures agree with the amounts and other disclosures presented in the prior
period or whether appropriate adjustments and/or disclosures have been made.
A. I only C. Both I and II only
B. II only D. Neither I nor II
28. In which of the following circumstances would an auditor’s report least likely include specific
reference to the corresponding figure?
A. When the auditor’s report on the prior period, as previously issued, included a modified
opinion and the matter which gave rise to the modification is resolved and properly dealt
with in the financial statements.
B. When the auditor’s report on the prior period, as previously issued, included a modified opinion
and the matter which gave rise to the modification is unresolved, and results in a modification of
the auditor’s report regarding the current period figures.
C. When the auditor’s report on the prior period, as previously issued, included a modified opinion
and the matter which gave rise to the modification is unresolved but does not result in a
modification of the auditor’s report regarding the current period figures.
D. When the auditor’s report on the prior period financial statements containing a material
misstatement included an unmodified opinion and the prior period financial statements have not
been revised and reissued, and the corresponding figures have not been properly restated and/or
appropriate disclosures have not been made.
29. According to PSA 710, the incoming auditor may refer to the predecessor auditor’s report on the
corresponding figures in the incoming auditor’s report for the current period. The incoming auditor’s
report should indicate
I. That the financial statements of the prior period were audited by another auditor.
II. The type of report issued by the predecessor auditor.
III.The date of the predecessor auditor’s report.
30. When the prior period financial statements are not audited, the incoming auditor should state in the
auditor’s report that
I. The corresponding figures are unaudited.
II. The incoming auditor is not required to perform procedures regarding opening balances of
the current period.
31. Mary Ruth, CPA, audited MDG Company’s prior-year financial statements. These statements are
presented with those of the current year for comparative purposes without Ruth’s auditor’s report, which
expressed a qualified opinion. In drafting the currents year’s auditor’s report, Christine Marie, CPA, the
incoming auditor, should
I. Not name Mary Ruth as the predecessor auditor.
II. Indicate the type of report issued by Mary Ruth.
III.Indicate the substantive reasons for Mary Ruth’s qualification.
IV.Indicate the date of Mary Ruth’s auditor’s report.
32. When comparative financial statements are presented, the auditor’s opinion on the financial
statements “taken as a whole” should be considered to apply to the financial statements of the
A. Current period only.
B. Current period and those of the other periods presented.
C. Current and immediately preceding period only.
D. Periods presented plus one preceding period.
33. Comparative financial statements include the financial statements of the prior year that were audited
by a predecessor auditor whose report is not presented. If the predecessor’s report was qualified, the
incoming auditor should
A. Express an opinion only on the current year’s statements and make no reference to the prior
year’s statements.
B. Issue an updated comparative audit report indicating the division of responsibility.
C. Request the client to reissue the predecessor’s report on the prior year’s statements.
D. Indicate the substantive reasons for the qualification in the predecessor auditor’s opinion.
34. The predecessor auditor, who is satisfied after properly communicating with the incoming auditor,
has reissued his/her auditor’s report on prior year financial statements. The predecessor auditor’s report
should
A. Refer to the work of the incoming auditor in the scope and opinion paragraphs.
B. Refer to the report of the incoming auditor only in the scope paragraph.
C. Refer to both the work and the report of the incoming auditor only in the opinion paragraph.
D. Not refer to the report or the work of the incoming auditor.
35. The following statements relate to unaudited prior year financial statements that are presented in
comparative form with audited current year financial statements. Which is incorrect?
A. The incoming auditor should state in the auditor’s report that the comparative financial
statements are unaudited.
B. The incoming auditor need not perform audit procedures regarding opening balances of
the current period.
C. Clear disclosure in the financial statements that the comparative financial statements are
unaudited is encouraged.
D. In situations where the incoming auditor identifies that the prior year unaudited figures are
materially misstated, the auditor should request management to revise the prior year’s figures or
if management refuses to do so, appropriately modify the report.