1.

Which of the following is not a step in

an auditor’s assessment of control risk? 5. The subject matter of an assurance
a. Obtain an understanding of the entity’s engagement can take the following
information system and control environment.
forms EXCEPT:
b. Perform tests of details of transactions to
a. Historical or Prospective financial
detect material misstatements in the
statements.
financial statements.
c. Evaluate the effectiveness of internal control
b. Evaluation of a capital investment proposal.
with tests of controls. c. Performance of an entity that could indicate
efficiency and effectiveness.
d. Consider whether controls can have a
pervasive effect on financial statement d. The entity’s internal control.
assertions.
6. Which of the following parts of the audit
2. According to PSA 315, the following described by this statement? “The
procedures are used to obtain an auditor examines the evidence
understanding of the entity and its supporting the account balances and
environment, EXCEPT: disclosures in the financial statements.”
a. observing the production procedures a. Issuing the audit report.
b. inquiries of management b. Planning.
c. inventory count c. Performing substantive tests.
d. computing the gross profit rate for three d. Studying and testing internal control.
years

7. This is a listing of all the things which

3. Which of the following situation would
the auditor will use to gather sufficient
most likely require special audit
appropriate audit evidence:
planning by the auditor?
a. Audit program
a. Some items of factory and office equipment
b. Audit procedures
do not bear identification numbers.
b. Inventory comprises precious stones.
c. Audit risk model

c. Depreciation methods used on the client’s

d. Audit plan
tax return differ from those used on the
books. 8. The development of a general strategy
d. Assets costing less than P10,000 are and a detailed approach for the
expensed even though the expected life
exceeds one year. expected nature, timing and extent of
audit refers to:
4. To obtain an understanding of a a. Audit planning
continuing client’s business, an auditor b. Supervision
most likely would c. Monitoring
a. Reevaluate the client’s internal control d. Direction
environment.
b. Read current issues of specialized industry 9. The expertise that distinguishes
journals. auditors from accountants is in the
c. Perform tests of details of transactions and a. Option Ability to interpret generally accepted
balances. accounting principles.
ANSWER: Review prior-year audit b. Accumulation and interpretation of evidence.
documentation and the permanent file for the c. Ability to interpret ASC statements.
client.
d. Requirement to possess education beyond b. The external auditor is responsible for the
the Bachelor’s degree. audit opinion expressed; however, that
responsibility may be reduced by any use
made of internal auditing
10.In obtaining an understanding of a
c. The external audit function’s objectives vary
client’s objectives, strategies and according to management’s requirements.
related business risks, the auditor d. Some judgments relating to the audit of the
financial statements are those of the internal
would most likely consider the following
auditor.
as business risks, EXCEPT:
a. The entity does not have the personnel or 14.Which of the following quality control
expertise to deal with the changes in the
industry. objectives would be least important to
b. There is increased product liability. the auditor?
c. Demand has not been accurately estimated. a. Engagement performance
d. The entity relies more on equity financing b. Determination of fees
rather than debt financing. c. Human resources

11.When making a client continuance 15.The primary reason for an audit by an

decision the auditor should evaluate independent, external audit firm is to
client based upon which of the a. Provide increased assurance to users as to
following? the fairness of the financial statements.
a. Client entity characteristics b. Guarantee that there are no misstatements
in the financial statements and ensure that
b. Independence risk factors any fraud will be discovered.
c. Financial reporting risks c. Satisfy governmental regulatory requirement
d. All of the above
16.The auditor further notices significant
12.Among the possible reasons why an
fluctuations in key elements of the
auditor will discontinue servicing an
company’s financial statements. If
audit client is
management is unable to provide an
a. A change in the client management and the
auditor is worried about the reputation of the acceptable explanation, the auditor
new management should
b. The auditor has to use a specialist in a. Perform additional audit procedures to
verifying inventory valuation investigate the matter further.
c. The auditor is also rendering at the same b. Intensify the examination with the
time, a management advisory engagement expectation of detecting management fraud
for the same client.
c. Withdraw from the engagement
d. Too many errors have to be adjusted to
d. Consider the matter of a scope limitation
make the financial statements conform with
PFRSs
17.The probability that an auditor will give
13.Which statement is correct regarding an inappropriate opinion on financial
the relationship between internal statements is:
auditing and the external auditor? a. Audit risk.
a. Certain aspects of internal auditing may be b. Inherent risk.
useful in determining the nature, timing and c. Control risk.
extent of external auditing procedures. d. Detection risk.
18.Which of the following statements is not circumstances of the engagement as a
basis for a positive form of expression of
a reason for utilizing analytical review the practitioner’s conclusion.
procedures?
a. To highlight changes from the prior year to 21.To emphasize auditor independence
the current year so that trends can be
from management, many corporations
identified which will influence audit planning.
b. To determine the magnitude of errors in the follow the practice of
financial statements. a. Establishing a policy of discouraging social
c. To assess the entity’s ability to continue as a contract between employees of the
going concern. corporation and the staff of the independent
auditor.
b. Appointing a partner of the CPA firm
19.When a CPA express an opinion on conducting the audit to the corporation’s
financial statements, his or her audit committee.
responsibilities extend to c. Requesting that a representative of the
independent auditor be on hand at the
a. Active participation in the implementation of
annual stockholders’ meeting.
the advice given to the client.
d. Having the independent auditor report to an
b. An ongoing responsibility for the client’s
audit committee of outside members of the
solvency. board of directors.
c. Whether the results of the client’s operating
decisions are fairly presented in the financial 22.Which of the following statements is
statements. INCORRECT? [S1] CPAs report on
d. The underlying wisdom of the client’s financial statements primarily because
management decisions.
a misstatement of account balances
20.The Philippine Framework for may exist and is always corrected as a
Assurance Engagements identifies two result of the independent auditor’s
types of assurance engagement a work. [S2] A poorly designed internal
practitioner is permitted to perform: a control structure will always lead the
reasonable assurance engagement and CPA to give an adverse opinion on the
a limited assurance engagement. financial statements.
a. Both S1 and S2
Which of the following is the objective
b. S2 only
of a limited assurance engagement?
c. Neither are incorrect.
a. A reduction in assurance engagement risk d. S1 only
to a very low level in the circumstances of
the engagement as a basis for a disclaimer
of the practitioner’s conclusion. 23.Which of the following would an auditor
b. A reduction in assurance engagement risk most likely use in determining the
to a level that is acceptable in the
circumstances of the engagement as a auditor’s preliminary judgment about
basis for a negative form of expression of materiality?
the practitioner’s conclusion. a. The results of the initial assessment of
c. A reduction in assurance engagement risk control risk.
to a level that is acceptable in the b. The assertions that are embodied in the
circumstances of the engagement as a financial statements.
basis for a qualified form of expression of c. The entity’s financial statements of the prior
the practitioner’s conclusion. year.
d. A reduction in assurance engagement risk
to an acceptably low level in the
d. The anticipated sample size for planned a. Looking at a process or procedure being
substantive tests. performed by others.
b. Physical examination of tangible assets.
24.Which of the following is an objective of c. Seeking information of knowledgeable
persons, both financial and non-financial
a review engagement?
information, throughout the entity or outside
a. Reporting that the financial statements, in the entity.
all material respects, fairly present the d. Examining records or documents, whether
financial position and operating results of internal or external, in paper form, electronic
the client. form, or other media.
b. Expressing a positive opinion that the
financial information is presented in
28.An auditor evaluates the existing
conformity with generally accepted
accounting principles. system of internal control in order to:
c. Expressing a limited assurance to users a. Ascertain whether any employees have
who have agreed as to procedures that will incompatible functions.
be performed by the CPA. b. Determine the extent of compliance tests
d. Reporting whether material modifications which must be performed.
should be made to such financial c. Ascertain whether irregularities are probable.
statements to make them conform with d. Determine the extent of substantive tests
generally accepted accounting principles. which must be performed.

25.Which of the following least likely limits 29.The primary reason why a CPA firm
the auditor’s ability to detect material establishes quality control policies and
misstatement? procedures for human resources is to
a. Audit is based on testing. a. Comply with the continuing educational
b. The inherent limitations of any accounting requirements imposed for all staff
and internal control system. accountants in CPA firms.
c. Audit procedures that are effective in b. Provide reasonable assurance that staff
detecting ordinary misstatements are personnel will have the capability,
ineffective in detecting intentional competence and commitment to ethical
misstatements. principles required to enable them to fulfill
d. Most audit evidence are conclusive rather their responsibilities in accordance with
than persuasive. professional standards and regulatory and
legal requirements
c. Provide a forum for staff accountants to
26.As it relates to an audit, materiality is exchange their experiences and views
a. determined based upon the importance to a concerning firm policies and procedures.
user of the financial statements d. Establish in fact as well as in appearance
b. not taken into consideration that staff accountants are increasing their
c. based upon audit fees knowledge of accounting and auditing
matters.
d. related only to the sufficiency of procedures
performed
30.Which one of the following is more
27.Observation and inspection may difficult to evaluate objectively? *
support inquiries of management and a. Efficiency and effectiveness of operations.

others, and also provide information

b. Compliance with government regulations.
c. Presentation of financial statements in
about the entity and its environment. accordance with generally accepted
Which of the following statements best accounting principles.
describes “observation”? d. All three of the above are equally difficult.
 estimates
31.Which of the following discoveries
through the use of analytical
35.The acceptable level of detection risk is
procedures, would indicate a relatively
inversely related to the
high risk of financial failure? a. Risk of misapplying auditing procedures.
a. A higher than normal ratio of long-term debt b. Assurance provided by the substantive tests.
to net worth as well as a lower than average
ratio of profits to total assets. c. Risk of failing to discover material
misstatements.
b. A decline in gross margin percentages.
d. Preliminary judgment about materiality
c. An increase in the ratio of allowance for
levels.
uncollectible accounts to gross accounts
receivable, while at the same time accounts
receivable turnover also decreased. 36.When reliance on internal controls
d. An increase in the balance in fixed assets. increases, the reliance placed on
substantive tests:
32.Which of the following ultimately a. Increases
determines the specific audit b. Decreases
procedures necessary to provide an c. Remains the same
independent auditor with a reasonable d. Cannot be determined
basis for the expression of an opinion?
a. Auditing standards. 37.The review of a company’s financial
b. The audit program. statements by CPA firm:
c. The auditor’s judgment. a. Is of similar scope as an audit and adds
d. The audit documentation. similar credibility to the statements.
b. Culminates in issuance of a report
expressing the CPAs opinion as to the
33.The following are the matters to be fairness of the statements.
considered by the auditor in c. Is substantially less in scope of procedures
than an audit.
establishing the overall audit strategy,
d. Requires detailed analysis of the major
EXCEPT accounts.
a. Assess risk and materiality
b. Defining the scope of the examination 38.When an unusual fluctuation is
c. Ascertaining the reporting objectives of the
engagement
indicated by analytical procedures and
d. Computation of audit fees management is unable to provide a
satisfactory explanation, the auditor
34.Which of the following is not considered must assume that there is a high
by the auditor when preparing an probability that an error or irregularity
overall audit strategy? exists. In this case, the auditor must:
a. The effect of information technology on the a. Issue either a qualified or an adverse
audit opinion.
b. The nature and timing of reports and other b. Issue either a qualified opinion or a
communication with the entity that are disclaimer.
expected under the engagement c. Issue a disclaimer.
c. The content of the management d. Design other appropriate audit procedures to
representation letter. determine if such errors do exist.
d. The identification of complex accounting
areas including those involving accounting
39.In relation to completed engagements, 43.Holding other planning considerations
these are procedures designed to equal, a decrease in the amount of
provide evidence of compliance by misstatements in a class of transactions
engagement teams with the firm’s that an auditor could tolerate most likely
quality control policies and procedures. would cause the auditor to
a. Inspection a. Apply the planned substantive tests prior to
b. Engagement quality control review the balance sheet date.
c. Quality Control b. Perform the planned auditing procedures
closer to the balance sheet date.
d. Monitoring
c. Increase the assessed level of control risk
for relevant financial statement assertions.
40.Which one of the following is not part of d. Decrease the extent of auditing procedures
the attest process? to be applied to the class of transactions.
a. Gathering evidence about assertions.
b. Evaluating evidence against objective 44.According to PSA 315, the following
criteria. procedures are used to obtain an
c. Proving the accuracy of the books and
records. understanding of the entity and its
d. Communicating the conclusions reached. environment, EXCEPT:
a. Analytical procedures.
41.An operational audit differs in many b. Recomputation.
ways from an audit of financial c. Observation and inspection.
d. Inquiries of management.
statements. Which of the following is
the best example of one of these
45.Defensive auditing includes all of the
differences?
following EXCEPT
a. The boundaries of an operational audit are
a. knowing when your client is about to fire
often drawn from an organization chart and
your firm before hand
are not limited to a single accounting period.
b. The operational audit deals with pre-tax
b. carefully selecting which clients to accept
and retain
income.
c. Operational audits do not ordinarily result in
c. clarifying the nature of the arrangement
through the use of a written engagement
the preparation of a report
letter
d. The usual audit of financial statements
d. evaluation of a firm’s capacity to adequately
covers the four basic statements; whereas
perform services for a specific client
the operational audit is usually limited to
either the balance sheet or the income 46.Which of the following would heighten
statement.
an auditor's concern about the risk of
fraudulent financial reporting?
42.In making a decision to accept or retain
a. Large amounts of liquid assets that are
a client, the firm should consider all of easily convertible into cash
the following EXCEPT b. Management's lack of interest in increasing
a. Its ability to comply with ethical requirements the dividend paid on common stock
b. Its competence c. Inability to generate positive cash flows from
operations, while reporting large increases in
c. The integrity of the client’s management
earnings
d. The type of opinion to be issued d. Inability to borrow necessary capital without
obtaining waivers on debt covenants
47.In compliance with the element of
human resources, the firm should
address issues relating to
a. Consultation
b. Engagement performance
c. Assignment of engagement teams
d. Differences of opinion

48.Evidence gathering in a scientific

experiment is most similar to which
phase of the audit?
a. Planning and supervising an engagement.
b. Evaluating whether the financial statements
are fairly presented.
c. Hypothesizing that financial statements are
presented fairly.
d. Assessing risks and designing audit
procedures to address these risks.

49.Identify the following as financial audit

(FA), compliance audit (CA), and
operational audit (OA): [1] A supervisor
is not carrying out his assigned
responsibilities. [2] A company’s tax
return does not conform to income tax
laws and regulations. [3] A
municipality’s financial statements
correctly show actual cash receipts and
disbursements. [4] A company’s
receiving department is inefficient.
a. CA, CA, FA, CA.
b. OA, CA, CA, OA.
c. CA, CA, FA, OA.
50.In an audit situation, communication
between the successor and
predecessor auditors should be:
a. Acknowledged in a representation letter.
b. Authorized in an engagement letter.
c. Written and included in the working papers.
ANSWER: Either written or oral