No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

Auditing Theory – Pre-week Lecture

I. Introduction to Financial Statements Audit, Pre-engagement Activities

a. Assurance and Non-assurance Engagements
b. Reasonable and Limited Assurance
c. Attestation and Direct Reporting Engagements
d. Elements of an Assurance Engagement (3SECC – 3-party relationship, appropriate
Subject matter, suitable Criteria, sufficient appropriate Evidence, written assurance report
or Conclusion)
e. Appropriate Subject matter: Financial, Non-financial, Physical characteristics, Systems
and Processes, Behavior
f. Suitable Criteria: (RUNCR) Reliable, Understandable, Neutral, Complete, Relevant
g. Types of Audit according to subject matter (Financial, Operations, Compliance)
h. Types of Audit according to types of auditor (External, Internal, Governmental)
i. Assurance Engagement Risk and Audit Risk
j. Financial Statement Assertions: (TOCCAC, ACERV, POCAC) Transactions and Events:
Occurrence, Completeness, Cut-off, Accuracy, Classification ; Account Balances:
Completeness, Existence, Rights and Obligations, Valuation and Allocation ;
Presentation and Disclosure: Occurrence and rights and obligations, Completeness,
Accuracy and Valuation, Classification and Understandability
k. Audit Risk Model = (AR = RoMM x DR) (AR = IR x CR x DR)
l. Acceptance and Continuance Procedures (auditor and client considerations)
m. Communication with Predecessor Auditor
n. Engagement Letter (Objective and Scope, Responsibilities, Applicable FRF, Form and
content of reports)

MCQs:

1. The independent audit is important to readers of financial statements because it:

a. Guarantees the accuracy of the facts and figures contained in the FS.
b. Determines the effectiveness and efficiency of management in managing the resources
of the company.
c. Assures the shareholders that the management of the entity is not committing illegal acts.
d. Involves the objective examination of and reporting on information prepared by
management.
2. Which of the following is least likely an example of an assurance engagement?
a. Providing an assessment of the effectiveness of a client’s accounting information
systems.
b. Examination report on a financial projection.
c. Review and reporting on tax returns filed by a client.
d. Providing expert opinion in an ongoing court case.
3. Which of the following statements is TRUE about audit evidence?
a. Relevance is a measure of the usefulness of audit evidence.
b. To determine the relevance of audit evidence, the auditor checks the nature of the
evidence, its source, and the circumstances under which it was obtained.
c. Externally obtained evidence is always more reliable than internally obtained evidence.
d. The auditor performs one procedure to validate each financial statement assertion.
4. Which of the following is most likely a reason why intended users need auditor’s report on
financial statements?
a. Users have access to the accounting records that support the financial statements.
b. Users have sufficient understanding of complex transactions and accounting principles.
c. Management can potentially be biased in preparing the financial statements.
d. Regulators provide users the right to have the company’s financial statements audited.
5. Which of the following factors is controllable by the auditor?
a. Risk of material misstatements
b. Inherent Risk
c. Control Risk
d. Detection Risk
6. Which of the following is not among the factors that an auditor considers as to whether he/she
would send a new engagement letter for a recurring audit?
a. A significant change in ownership of the client.
b. A change in legal or regulatory requirements.
c. A change in financial reporting framework.

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Mobile : 0927 283 8234
Telephone : (043) 723 8412
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d. A change in the auditor’s firm structure.

7. I. Audit risk refers to the risk that the auditor expresses an inappropriate conclusion when the
financial statements are not materially misstated.
II. One of the ways the auditor can manage detection risk is by examining more items during the
evidence gathering phase.
III. The higher the risk of material misstatements, the higher the amount of tolerable
misstatements that the auditor will establish for an engagement.
a. I and II are correct.
b. II and III are correct.
c. I and III are incorrect.
d. II and III are incorrect.
8. During the pre-engagement phase of an audit client which is an initial audit engagement, the
burden of initiating communication for determining matters related to acceptance of the
engagement rests with the
a. Predecessor auditor
b. Successor auditor
c. Predecessor and Successor auditor as they are equally responsible.
d. Management, representing the successor auditor.

II. The Accountancy Profession

a. Areas of the Accountancy Profession
b. The Professional Regulatory Board of Accountancy (PRBOA) – a chairman and six (6)
members
c. APO/PICPA (5 nominees) > PRC (3 recommendees) > President (1 appointee)
d. Term of Office: 3-year term, renewable for another term (1 year cooling off). Appointment
to fill an unexpired term is not considered a complete term. No person shall serve BOA
for more than twelve (12) years.
e. CPA Licensure Examinations
f. Registration as CPAs
g. Accreditation Process
h. Related Organizations and Standard-setting Bodies (FRSC, AASC, ETC, QRC, PICPA,
CPD Council, PRC, COA, SEC, BIR, BSP, IC)

MCQs:
1. The signature of the chairperson of PRC and the chairman and members of BOA can be seen in
the CPA’s:
a. Certificate of Registration
b. Professional Identification Card
c. Both A and B
d. Neither A nor B
2. What is the minimum number of units required to be taken by a candidate that is taking a
refresher course?
a. 12 units
b. 24 units
c. 36 units
d. 30 units
3. The Certificate of Completion issued by a CHED and BOA accredited institution offering refresher
course is valid for how many years?
a. One year
b. Two years
c. Three years
d. Five years
4. Which of the following would not be issued a special or temporary permit by PRBOA?
a. Foreign CPA called for consultation or for a specific purpose, essential for the
development of the country, wherein no Filipino CPA is qualified for such purpose.
b. Foreign CPA engaged as professor, lecturer, or critic in fields essential for the
advancement of accountancy education.
c. Foreign CPA who is a CFO of a multinational corporation operating in the Philippines.
d. Foreign CPA who is an internationally recognized expert and his/her service is essential
for the advancement of accountancy in the Philippines.
5. Which of the following is represented in FRSC, but not in AASC?
a. Board of Accountancy
b. Commission on Audit
c. Securities and Exchange Commission

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d. Bureau of Internal Revenue

6. Which of the following statements about the term of office of the chairman and the members of
the Board of Accountancy (BOA)?
a. The Chairman and members of the Board shall hold office for a term of three years.
b. A person may not serve the Board of Accountancy for more than twelve years.
c. No member of the Board of Accountancy shall have a term expiring concurrently with
other members of the Board.
d. A current member of the Board of Accountancy may serve for another term, with no
cooling-off requirement, if the subsequent term is the member’s second term serving the
Board.
7. Among the similarities of the Education Technical Council (ETC) and Quality Review Committee
(QRC) is that both of them shall be composed of:
a. Seven members with a chairman
b. Six members with a chairman
c. A chairman who is a senior public practitioner
d. A chairman who is a senior accounting practitioner in education
8. 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
Commission, that such registrant has acquired how many years of meaningful experience in any
of the areas of public practice?
a. One
b. Two
c. Three
d. Four

III. Planning an Audit of Financial Statements

a. Overall Audit Strategy and Detailed Audit Plan
i. Overall Audit Strategy – Characteristics of the engagement, Reporting objectives,
Areas of interest, Results of pre-engagement activities, NTE of resources)
ii. Detailed Audit Plan – NTE of RAPs, NTE of FAPs (ToCs and SPs) and NTE of
other planned procedures
b. Benefits of Audit Planning (CAFÉ PA)
i. Coordination of work done
ii. Assignment of work to team
iii. Facilitating the direction, supervision and review of audit work
iv. Effective and Efficient audit
v. Resolve Potential Problems promptly
vi. Appropriate Attention to important areas
c. Risk Assessment Procedures (IIO + AP) (Inquiry, Inspection, Observation, Analytical
Procedures)
d. Materiality – Qualitative and Quantitative
e. Overall Materiality, Performance Materiality, Specific Materiality
f. Direction, Supervision and Review – Size and complexity, area of the audit, Assessed
RoMMs, team’s capability and competence
g. Professional Judgment and Professional Skepticism
h. Use of an expert, initial audits, and audit of small entities

MCQs:
1. The extent of planning activities would depend on all of the following except:
a. Size of the audit client
b. Auditor’s experience with the client or the client’s industry
c. Complexity of the transactions and the client’s processes
d. Size of the auditing firm
2. The nature, timing and extent of risk assessment procedures, further audit procedures, and other
planned audit procedures are best documented in the:
a. Overall audit strategy
b. Detailed audit plan
c. Engagement letter
d. Both A and B
3. Which of the following types of audit procedures is not attention directing?
a. Risk assessment procedures
b. Test of controls
c. Substantive procedures
d. All of the above are attention directing.

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JABELLAR/AIBAY/AJABINAL/RBERCASIO/JMAGLINAO/ASARMIENTO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

4. Which of the following statements is TRUE in relation to analytical procedures?

a. If there are concerns about the going concern assumption which arose only during the
current accounting period, performing trend analysis may not provide reliable audit
evidence for risk assessment and other analytical procedures.
b. Analytical procedures must be performed throughout the audit.
c. Substantive analytics are performed primarily for detecting material misstatements and
enhancing the auditor’s risk assessment procedures.
d. Inquiry, inspection and analytical procedures are performed to meet any audit procedure
according to purpose (RAP, TOC and SP).
5. In which of the following phases of audit are analytical procedures not required to be performed?
a. Risk Assessment
b. Risk Response
c. Conclusion and Reporting
d. It is required in all phases of audit.
6. Which of the following is least likely to be included in an audit program?
a. Audit procedures to be performed, including nature of documentation to be requested
from client contacts.
b. Time budget allocated to each activity/procedure.
c. Checklist of management written representations.
d. Audit team member responsible for each audit area.
7. Which of the following will most likely indicate the relevance of an audit procedure included in an
audit program?
a. The time budget allocated to each activity/procedure.
b. The number of items to be included in testing.
c. The assertions to be validated in performing the procedure.
d. The name of the personnel assigned to review the audit working papers.
8. It is a listing of procedures that will serve as a set of instructions to audit assistants involved in the
evidence gathering phase of the audit and also a means to control and record the proper
execution of the work.
a. Audit planning memorandum
b. Overall audit strategy
c. Audit plan
d. Audit program

IV. Study and Evaluation of Internal Controls

a. IC: Address risks (financial reporting, operations and compliance)
b. Limitations of IC: (COC CHA) Cost-benefit consideration, Management Override,
Collusion, Changes in Condition, Human error, most IC is directed to Anticipated
transactions
c. Components of IC: (CRIME) Control Environment, Risk Assessment Process, Control
Activities, Information & Communication Systems, Monitoring
d. Elements of Control Environment: (IM CPA HO) Integrity, Management’s philosophy and
operating style, Commitment to competence, Participation by TCWG, Assignment of
authority and responsibility, HR policies and procedures, Organizational structure
e. Risk Assessment: Risks? Likelihood and significance? Management? (IAM) Identify –
Assess – Manage
f. Information systems and communication: (PIISO) People, Input or data, Infrastructure,
Software, Output
g. Control Activities: Preventive or Detective
h. Control Activities: (PRAVS) Authorization and approvals, Reconciliations, Verifications,
Physical or Logical Controls, Segregation of Duties
i. Segregation of Duties: (I CARE) – Independent checks, Custody of Assets, Authorization
of transactions, Recording of transactions, Execution of transactions
j. Monitoring: Ongoing and Separate Evaluations
k. IC Understanding (RAP): Design and Implementation vs. IC Testing (FAP): Operating
Effectiveness
l. IC Understanding: Required vs. IC Testing: Not required
m. IC Understanding: IIO + Walkthrough, IC Testing: IIO + Reperformance
n. IC Documentation: Flowcharts, Narratives, ICQ (Questionnaires), Control Matrices, Policy
and Procedure Manuals
o. IC Deficiencies

MCQs:
1. Which of the following procedures is always required to be performed by the auditor?

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

a. Understanding of Internal Controls

b. Testing of Internal Controls
c. Testing of Details of Transactions and Balances
d. Both A and C
e. All of the above.
2. Two key concepts that underlie management’s design and implementation of internal controls
are:
a. Costs and authority
b. Absolute assurance and costs
c. Inherent limitations and reasonable assurance
d. Collusion and materiality
3. Which of the following is TRUE when the auditor uses the reliance approach on his/her audit?
a. The auditor may use a smaller sample size.
b. The auditor moves audit procedures nearer or at year-end.
c. The auditor is to perform more effective procedures.
d. The auditor may choose not to perform test of transactions.
4. Which of the following is a compensating control for the lack of segregation of duties for smaller
entities?
a. Owner designating a general manager in-charge of all business processes.
b. Active oversight by the owner-manager.
c. Use of automated information systems.
d. Strict compliance with paper-based documentation.
5. When auditing a private company, the auditor should obtain an understanding of internal control
sufficient to:
a. provide reasonable protection against client fraud and defalcations by client employees.
b. assess control risk.
c. provide a basis for suggestions to the client for improving the accounting system.
d. provide a method for safeguarding assets, checking the accuracy and reliability of
accounting data, promoting operational efficiency, and encouraging adherence to
prescribed managerial policies.
6. When is an auditor required to perform test of controls?
a. The auditor intends to rely on the internal controls.
b. Substantive procedures alone cannot provide sufficient and appropriate audit evidence.
c. Both A and B.
d. Neither A nor B.
7. Which of the following audit procedures is most likely performed exclusively for testing the
operating effectiveness of the client’s internal controls?
a. Inquiry
b. Inspection
c. Walk-through
d. Reperformance
8. In case of a recurring audit and if there have been changes in the internal controls over financial
reporting, the auditor is required to perform test of controls
a. Once every second audit.
b. Once every third audit.
c. At every current audit.
d. Whenever the auditor wishes.
9. Which of the following is least likely considered as a significant risk?
a. Risk of fraud
b. Highly complex transactions
c. Transactions with related parties
d. Transactions within the ordinary course of business

V. Transaction Cycles
a. Revenue/Receipt (receipt of order until receipt of payment)
i. Sales
ii. Credit department
iii. Warehousing
iv. Shipping
v. Billing
vi. Accounting
vii. Reception
viii. Treasury
b. Purchasing/Disbursement (request to purchase until payment to supplier)

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 No. 125 Brgy. San Sebastian
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Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

i. User
ii. Purchasing
iii. Receiving
iv. AP Department (Accounting)
v. Treasury
c. Personnel/Payroll (hiring until payment to employees)
i. User
ii. HR Department
iii. Timekeeping
iv. Payroll Computation
v. Accounting
vi. Treasury
d. Inventory/Production (production planning to cost accounting)
i. User/Production
ii. Raw Materials Storage
iii. User/Production
iv. Finished Goods Storage
v. Cost Accounting
vi. General Accounting
e. Investing/Financing (acquisition, custody, and record-keeping)
i. Acquisition: Specific authorization from BOD
ii. Custody: Independent custodian or Treasury
iii. Record-keeping: Accounting

MCQs:
1. This document is used by the accounts receivable department to support credits to the accounts
receivable master file.
a. Remittance advice
b. Sales order
c. Sales invoice
d. Customer statement
2. The list of authorized customers used to minimize exposure to high-risk credit customers usually
originate from the:
a. Sales department
b. Upper management
c. Credit department
d. Billing department
3. The most important step in terms of sales record-keeping in the revenue and receipt cycle rests
with which of the following department?
a. Sales
b. Billing
c. Inventory
d. Credit
4. Which of the following is one of the roles of the purchasing department?
a. Preparation of the purchase requisition form.
b. Finding the lowest cost vendor with best possible quality.
c. Counting the goods arriving from suppliers.
d. Posting the vendor’s invoices to the accounting records.
5. Which of the following supporting documents are usually tested by the AP department as part of
the three-way match?
a. Sales order, shipping document, sales invoice
b. Purchase requisition, purchase order, receiving report
c. Purchase order, receiving report, supplier invoice
d. Purchase order, receiving report, checks
6. Which of the following departments is responsible for the accumulation of production costs to jobs
or departments as the case may be?
a. Cost accounting
b. Production
c. General accounting
d. Treasury
7. The auditor’s consideration applicable to fixed asset acquisitions that are not present in the
purchasing/disbursement cycle is:
a. The performance of the three-way match.
b. Specific authorization.

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Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

c. A properly approved requisition form.

d. A fixed asset custodian.
8. In the financing cycle, approval of issuance of new debt or equity securities will least likely be
obtained from _________.
a. The board of directors
b. The shareholders
c. The budget committee
d. The creditors

VI. Consideration of Fraud, Error and NOCLAR

a. Fraud vs. Error
b. Professional Skepticism – Best method to detect fraud
c. Fraud Brainstorming and Discussion
d. Fraud Triangle: Incentive or Pressure, Attitudes or Rationalizations, Opportunity
e. Fraudulent Financial Reporting
f. Misappropriation of Assets
g. Management Fraud vs. Employee Fraud
h. Responsibilities of Management and the Auditor
i. Non-compliance with Laws and Regulations
j. Effect on the Financial Statements
k. Communication and Reporting
MCQs:
1. Which of the following is not an appropriate response when the auditor assesses a high risk of
fraud in relation to a financial statements audit?
a. Relying more on external evidence rather than internal evidence.
b. Performing the audit procedures at year-end rather than interim.
c. Obtaining evidence from more than once source to validate the assertion.
d. Placing more emphasis on the results of inquiries with senior management.
2. The following fraud risk factors fall into the same category. Which is the exception?
a. Lack of asset reconciliations.
b. Personal financial obligations of employees.
c. Threat of future employee layoffs.
d. Unreasonable expectations attached to compensation and other rewards.
3. If there is no specific law/regulation requiring the auditor to communicate findings of fraud/non-
compliance during the audit,
a. The auditor uses professional judgment on deciding whether or not to communicate such
findings to regulatory agencies.
b. The auditor must seek the advice of a legal counsel in deciding whether or not to
communicate such findings to regulatory agencies.
c. The auditor must not communicate this information, consistent with the principle of
maintaining confidentiality of client information.
d. The auditor must withdraw from the engagement because of the compromised integrity of
client’s management.
4. The difference between direct effect and indirect effect illegal acts is that the auditor is not
required to provide reasonable assurance about the company’s compliance for
a. Direct effect illegal acts
b. Indirect effect illegal acts
c. Both A and B.
d. Neither A nor B.
5. The auditor is most likely to presume that a high-risk of a defalcation exists if
a. Management is pressured to report consistent and unrealistic growth rates to current and
prospective investors.
b. Inadequate segregation of duties places an employee in a position to perpetrate and
conceal thefts.
c. Inadequate employee training results in lengthy exception reports from the company’s
accounting information system logs.
d. Management personnel’s lifestyle significantly differs from employees classified as rank
and file.
6. Which of the following is a category of risk factors that should be considered in relation to
misstatements arising from fraudulent financial reporting?
a. Industry conditions
b. Susceptibility of assets to misappropriation
c. Internal control policies for segregation of duties
d. Assets that are easily transferable and lacking means for identifying ownership.

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

7. Non-compliance with laws and regulations that are mostly operational in nature are
a. Not considered by the auditor in the audit of financial statements.
b. Considered by the auditor only in identifying possible unrecorded fines and penalties.
c. Considered by the auditor only if management willingly provides evidence about such
non-compliance.
d. Considered by the auditor only if legal counsel provides evidence on the probability of an
outflow and its amount.

VII. Evidence and Substantive Tests, Intro to Sampling

a. Underlying accounting records and other information
i. Underlying accounting records – used to prepare FS
ii. Other information – other than (i)
b. Sufficient and Appropriate Audit Evidence (SAAE)
i. Sufficiency – RoMM (Direct) and Quality (Indirect)
ii. Appropriateness – Relevance and Reliability
iii. Relevance – Nature of Procedures (RAP, TOC or SP), Assertions, Direction of
Testing
1. Vouching – Records to Documents, Existence or Occurrence,
Overstatement, Assets/Income
2. Tracing – Documents to Records, Completeness, Understatement,
Liabilities/Expenses
iv. Reliability – Nature and Source of Evidence and Circumstances (General Rule:
external, effective IC, directly obtained, documented, original)
c. Test of details and Substantive Analytics
d. Substantive Procedures: IIO + AP + External Confirmation, Recalculation
e. ToD (required): Recorded Amounts vs. Supporting Documents
f. SAP (not required): Recorded Amounts vs. Auditor's Expectations
g. Audit for Accounting Estimates: Reasonableness
MCQs:
1. The main difference between test of controls and substantive procedures is that substantive
procedures:
a. Give the auditor an evaluation of the likelihood of material misstatement.
b. Enable the auditor to actually detect material misstatements.
c. Update the auditor’s control risk assessment.
d. Improve the auditor’s reliance on the internal controls.
2. Which of the following best describes the objective of performing substantive procedures?
a. To obtain an understanding of the entity and its environment, including its internal control,
in order to identify and assess the risks of material misstatements.
b. To test the operating effectiveness of internal controls in preventing, detecting, and
correcting material misstatements.
c. To detect material misstatements at the assertion level.
d. All of the above.
3. Which of the following procedures would provide the auditor with the most reliable evidence,
though also the costliest?
a. Inquiry
b. Inspection
c. External Confirmation
d. Recalculation
4. Which of the following procedures is least likely reliable when used alone, but among the most
extensively used during the audit, and enhances the reliability of other audit procedures?
a. Inquiry
b. Inspection
c. Observation
d. Analytical Procedures
5. The main difference between vouching and tracing is that tracing:
a. Selects an item of transaction and follows/verifies it into the accounting records.
b. Is normally used for test of overstatement.
c. Is normally designed for the audit of assets and income accounts.
d. Uses electronic audit trail rather than paper audit trail.
6. Other information that the auditor may use as audit evidence least likely includes
a. Job cost allocations from the cost accounting department.
b. Minutes of meetings.
c. Confirmation replies received from audit client’s customers.
d. Information obtained by the auditor’s inquiry, inspection and observation
7. Which of the following statements about audit evidence is incorrect?
a. The relationship between the risk of material misstatements and the amount of evidence
to gather is direct.

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b. The relationship between the quality of evidence and the amount of evidence to gather is
indirect.
c. The relationship between the quality of evidence and the amount of evidence to gather is
direct.
d. Gathering more audit evidence does not compensate for its poor quality.

VIII. Selecting Items for Testing and Audit Sampling

a. 100%, Specific, or Audit Sampling
b. Population and Sampling Unit
c. For testing below 100% - Ensure completeness of population before selecting items
d. Sampling Risk and Non-sampling Risk
i. Sampling risk – conclusion for sample ≠ conclusion for population
ii. Non-sampling risk – other than (i)
e. Alpha Sampling Risk vs. Beta Sampling Risk
i. Type 1 – Effect: More testing will be performed, Inefficient audit
ii. Type 2 – Effect: Less testing will be performed, Ineffective audit
f. Risk of under reliance (Type 1) vs. Risk of over reliance (Type 2)
g. Risk of incorrect rejection (Type 1) vs. Risk of incorrect acceptance (Type 2)
h. Managing sampling risks
i. Can be eliminated by 100% testing
ii. Increase sample size
iii. Choose appropriate sample selection method
i. Random Selection (Random Number Generator or RNGs, best for pre-numbered items),
Systematic Selection (interval), Haphazard Selection (no structure), Value-weighted
selection (higher amount = higher probability), and Block Selection (cluster, high
sampling risk)
j. Managing non-sampling risks
i. Cannot be eliminated
ii. Adequate planning and training
iii. Proper direction, supervision and review
k. Statistical (probability) vs. Non-statistical (judgment)
l. Attribute vs. Variable
i. Attribute – ToC , Variable – ToD
ii. Attribute – Qualitative , Variable – Quantitative
iii. Attribute – Deviations , Variable – Misstatements
iv. Attribute - % of occurrence , Variable – Peso value
m. Attribute sampling
i. Sample size relationships
1. Assessed RoMM (specifically CR) – Inverse
2. Acceptable beta sampling risk – Inverse
3. Confidence level – Direct
4. Tolerable deviation rate – Inverse
5. Expected deviation rate – Direct (If EDR > TDR, no TOCs)
6. Population size – Negligible
ii. Evaluation
1. If SDR > EDR or EMRoD > TDR, assess CR at maximum (EMRoD =
SDR + Allowance for sampling risk)
2. If SDR < EDR or EMRoD < TDR, assess CR at below maximum
iii. Others
1. Sequential (Stop or go) – no fixed sample size
2. Discovery (Accept/Reject) – one deviation = ineffective control
n. Variable sampling
i. Sample size relationships
1. Assessed RoMM – Direct
2. Alternative Procedures - Inverse
3. Acceptable beta sampling risk – Inverse
4. Confidence level – Direct
5. Tolerable misstatement – Inverse
6. Expected misstatement – Direct
7. Stratification – Inverse
8. Population size – Negligible
ii. Evaluation
1. Project misstatements (Ratio, Difference, or Mean-per-unit) to
population.
2. PM + AM < TM , fairly presented
3. PM + AM > TM , not fairly presented
iii. Projection
1. Ratio: %accuracy (based on sample) * Php Population
2. Difference: (average Php difference based on sample) * No. of
Population
3. Mean-per-unit: (average Php value based on sample) * No. of Population

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iv. Others
1. Value weighted sampling
o. Voided samples – properly voided? – If yes, replace. If not, deviation/misstatement
p. Missing samples – alternative procedures? – If yes, perform alternative. If not,
deviation/misstatement
q. Anomalous errors
MCQs:
1. In performing variables sampling for a certain audit procedure, which of the following has a direct
relationship with the sample size?
a. Alternative substantive procedures
b. Tolerable misstatement
c. Expected misstatement
d. Stratification of the population
2. If the expected deviation rate (EDR), exceeds the tolerable deviation rate (TDR), the auditor:
a. Does not perform test of controls.
b. Uses discovery sampling for test of controls.
c. Uses sequential sampling for test of controls.
d. None of the above is correct.
3. Under this method, each monetary unit comprising the population is considered as one sampling
unit. The main advantage of using this approach is that items of higher value have a greater
chance of being selected.
a. Value-weighted selection
b. Block selection
c. Haphazard selection
d. Systematic selection
4. Sampling risk that leads the auditor to conclude that a material misstatement exists when in fact it
does not is
a. Risk of assessing control risk too low
b. Risk of assessing control risk too high
c. Risk of incorrect rejection
d. Risk of incorrect acceptance
5. Which of the following attributes testing method is the least desirable to be used due to a possible
concentration of samples?
a. Block selection
b. Haphazard selection
c. Discovery
d. Sequential
6. It refers to the rate of deviation from prescribed internal control procedure set by the auditor in
respect of which the auditor seeks to obtain an appropriate level of assurance that is not
exceeded by the actual rate of deviation.
a. Tolerable deviation rate
b. Tolerable misstatement
c. Expected deviation rate
d. Expected maximum deviation rate
7. Which of the following statements in relation to anomalous errors in samples for attributes
sampling and variables sampling is/are correct?
a. Samples containing anomalous errors in attributes sampling are ordinarily replaced,
because these are merely isolated events.
b. Samples containing anomalous errors in variables sampling are considered and
projected to the population for evaluation.
c. Both A and B.
d. Neither A nor B.

IX. Completing the Audit and Audit Documentation

a. Concluding analytical procedures
b. Consideration of subsequent events (Type 1 – adjusting and Type 2 – non-adjusting)
i. Type 1 – conditions already existing as of FS date
ii. Type 2 – conditions arose after FS date
iii. Events up to auditor’s report date – Gather SAAE
iv. Facts discovered after auditor’s report date – General Rule: No responsibility,
except when relevant
c. Litigations and Claims
i. List of litigation and claims
ii. Management’s assessment of outcome
iii. Legal confirmation as to reasonableness of assessments
d. Going Concern Assumption
i. Did management make an assessment?
ii. Were there events or conditions that may cast ‘significant doubt’ as to GC
assumption?
iii. Were the events or conditions represent ‘material uncertainty’?
iv. Were there mitigating plans?

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v. If GC is inappropriate, were the FS prepared under alternative basis?

vi. If GC is appropriate, were the required FS disclosures made?
vii. Are there multiple material uncertainties related to GC?
e. Responsibility to gather SAAE: Up to the auditor’s report date
f. Written representations – General and Specific
i. Usually same date as auditor’s report
ii. Specific WRs (based on ISAs)
1. Fraud
2. Non-compliance with laws and regulations
3. Evaluation of misstatements
4. Accounting estimates
5. Related parties
6. Subsequent events
7. Going concern
8. Comparative information
9. Other specific items
g. Audit Documentation – form, content and extent
i. Permanent working papers
ii. Current working papers
h. Assembly and retention of audit documentation
i. Assembly – w/in 60 days from AR date
ii. Retention – ISA – 5 years, Revised SRC Rule 68 – 10 years
i. Communication with TCWG
i. Auditor’s responsibilities
ii. Scope and timing of the audit
iii. Significant findings
iv. Auditor independence
MCQs:
1. In rare circumstances when there are multiple material uncertainties exist in relation to the entity’s
going concern assumption, the auditor ______ on the financial statements:
a. Provides a disclaimer of opinion
b. Provides a qualified opinion or disclaimer of opinion
c. Provides a qualified or adverse opinion
d. Provides an adverse opinion
2. The auditor considers information on litigations and claims up to:
a. The date of the financial statements
b. The date of the auditor’s report
c. The date of the written representations addressing litigations and claims.
d. The date that the financial statements were authorized for issue.
3. When the auditor discovers after the audit report date that there were omitted procedures, which
of the following should the auditor perform first?
a. Evaluate the importance of the omitted procedure in supporting the issued opinion.
b. Inform the client about the omitted procedure.
c. Withdraw the audit report and opinion and inform users of the financial statements and
the report.
d. Seek the assistance of a legal counsel.
4. If there were alternative procedures performed that were, in the auditor’s judgment, sufficient to
support the auditor’s opinion, the auditor would issue a/an
a. Unqualified opinion without reference to the alternative procedures performed.
b. Unqualified opinion with an EOM paragraph referring to the alternative procedures
performed.
c. Unqualified opinion with an OM paragraph referring to the alternative procedures
performed.
d. Qualified opinion or disclaimer of opinion.
5. The audit working paper that groups similar general ledger accounts into Financial Statement
Line Items (FSLIs) is called
a. Lead schedule
b. Audit program
c. Trial balance
d. Evaluation of audit differences
6. Which one of the following would the auditor consider to be an indication of a potential going
concern problem?
a. Adverse key financial ratios
b. Loss of the controller to a competitor
c. A former auditor is hired as part of the company’s key management team
d. Large volume of sales recorded near year-end
7. The primary source of information to be reported about litigation, claims, and assessments is the
a. Client’s management
b. Client’s lawyer
c. Court records
d. Independent auditor

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X. Quality Management for Audit and Assurance Firms

a. Inputs, Process, Outputs, Interactions within the Financial Reporting Supply Chain, and
Contextual Factors
b. Components of Quality Management (LEA-HEM)
c. Leadership Responsibilities
d. Ethical Requirements
e. Acceptance and Continuance Procedures
f. Human Resources (Resources*)
g. Engagement Performance
h. Monitoring (and Remediation)
i. Firm’s risk assessment procedures + Information and communication

MCQs:
1. A partner, other person in the firm, suitably qualified external person, or a team made up of such
individuals, none of whom is part of the engagement team, with sufficient and appropriate
experience and authority to objectively evaluate the significant judgments made by the
engagement team and the conclusions it reached in formulating the report.
a. Engagement quality control reviewer
b. Engagement partner
c. Key audit partner
d. Engagement manager
2. ISQM is NOT applicable to which of the following engagements?
a. Audit of historical financial statements
b. Audit of prospective financial statements
c. Review of financial statements
d. Tax consultancy engagements

XI. Audit Reporting (General Purpose) and Using the Work of Others
a. Opinion: Unmodified/Unqualified, Qualified, Adverse, Disclaimer
b. Report Content: TAO-BIR-SAD
c. Title
d. Addressee
e. Auditor’s Opinion
f. Basis for Opinion
g. *Key Audit Matters – required for listed, voluntary for others
h. Other Information
i. Responsibilities for the financial statements
j. Auditor’s Responsibilities
k. Name and signature of auditor
l. Address of the auditor
m. Date of the report
n. Modified report
i. Opinion
ii. Basis for Opinion
iii. Auditor’s Responsibilities (modified for disclaimer)
iv. Omission of OI Paragraph (disclaimer)
v. Omission of KAM Paragraph (disclaimer)
o. EOM and OM paragraphs
i. EOM – FS understanding, with reference to Notes to FS, opinion is not modified.
ii. OM – Audit understanding, no reference to Notes to FS, opinion may be modified
or not.
p. Comparative Information: Corresponding figures and Comparative FS

MCQ:
1. Communication for key audit matters is required for:
a. Listed Entities
b. Public Interest Entities (PIEs), as required by law or regulation
c. Both A and B.
d. None of the above.

XII. Reporting on Special Purpose Engagements and Other Audit-related Services

a. Special-purpose engagements
b. Single FS and Specific elements, accounts, or items of a FS
c. Summary FS
d. Review Engagements
e. Agreed-upon Procedures
f. Compilation

MCQ:

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1. To which of the following engagements do we apply the requirements of PSAs?

a. Special-purpose engagements
b. Single FS and Specific elements
c. Review engagements
d. A and B
e. All of the above.

XIII. Code of Ethics

a. Part 1 – Complying with the Code, Fundamental Principles and Conceptual Framework
b. Part 2 – Professional Accountants in Business (PAIBs)
c. Part 3 – Professional Accountants in Public Practice (PAPPs)
d. Part 4A – Independence for Audit and Review Engagements
e. Part 4B – Independence for Assurance Engagements other than Audits and Reviews
f. Fundamental Principles (COBID): Integrity, Objectivity, Professional Competence and
Due Care, Confidentiality, and Professional Behavior
g. Threats (IFASS): Self-interest, Self-review, Advocacy, Familiarity, Intimidation
h. Long Association Provisions: 7-year time-on period. Cooling-off: Engagement Partner – 5
years, EQCR – 3 years, Other KAPs – 2 years

MCQs:
1. This is a fundamental principle of ethics which is characterized as “to comply with relevant laws
and regulations and avoid any conduct that the professional accountant knows or should know
might discredit the profession.”
a. Integrity
b. Professional Behavior
c. Professional Competence and Due Care
d. Objectivity
2. A CPA-lawyer is currently practicing both his accounting and legal profession. Because of
providing legal advice and representing his/her clients, there is a ________ threat if the same
client is an audit client.
a. Familiarity
b. Advocacy
c. Self-interest
d. Self-review
3. The principle of professional behavior requires a professional accountant to
a. Be straightforward and honest in performing professional services.
b. Perform professional services with due care, competence and diligence.
c. Be fair and should not allow prejudice or bias, conflict of interest or influence of others to
override objectivity.
d. Act in a manner consistent with the good reputation of the profession and refrain from
any conduct which might bring discredit to the profession.
4. In which of the following circumstances would a CPA bound by the Code of Ethics to refrain from
disclosing any confidential information obtained during the course of a professional engagement?
a. An inquiry by the PRC is made regarding the CPA’s quality control policies and
procedures.
b. Confidential information is made available with the client’s permission.
c. A major stockholder of an audit client seeks accounting information from the CPA after
the management declined to disclose the requested information.
d. The CPA is issued summon enforceable by the court which orders the CPA to present
confidential information.
5. Which fundamental principle is threatened by an engagement wherein the CPA prepares the
financial statements of a company and the professional fees are based on the net proceeds on
loans received by the client from a commercial bank?
a. Integrity
b. Objectivity
c. Confidentiality
d. Professional behavior
6. It refers to the avoidance of facts and circumstances that are so significant that a reasonable and
informed third party, having knowledge of all relevant information, including safeguards applied,
would reasonably conclude a firm's or a member of the assurance team's integrity, objectivity or
professional skepticism had been compromised.
a. Independence in fact
b. Independence in appearance
c. Independence
d. Independence in mind
7. Accepting gift or undue hospitality from an assurance client would most likely create a

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a. Self-review threat
b. Self-interest threat
c. Familiarity threat
d. Intimidation threat

XIV. Auditing in an IT Environment

a. Reduction of paper transaction trails
b. Uniform, automated processing of transactions
c. General and Application Controls
d. Database Systems, Operating Systems and Networks
e. Auditing Around the Computer (Blackbox Approach)
f. Auditing Through the Computer (Whitebox Approach, CAATs)
g. Test data, Integrated Test Facility (ITFs), Parallel Simulation, etc.

MCQ:
1. When the auditor only tests the input and output of a system rather than the program itself,
a. The auditor will be able to detect all program errors.
b. The auditor will not be able to detect program errors which do not show up in the output
sampled.
c. The auditor is not able to gather sufficient and appropriate audit evidence on the
computerized systems.
d. The auditor is not competent to perform audit of the program itself because of its highly
technical nature.
2. Internal control is ineffective when computer department personnel
a. Participate in computer software acquisition decision.
b. Originate changes in master files.
c. Design documentation for computerized systems.
d. Provide physical security for program files.
3. Which of the following controls is an input control designed to ensure the reliability and accuracy
of data processing?
a. Limit test
b. Validity check test
c. Both A and B
d. Neither A nor B
4. Which of the following is not likely a control over removable storage media to prevent
misplacement, alteration without authorization or destruction?
a. Using cryptography, which is the process of transforming programs and information into
an unintelligible form.
b. Keeping current copies of diskettes, compact disks or back-up tapes and hard disks in a
fireproof container, either on-site, off-site or both.
c. Placing responsibility for such media under personnel whose responsibilities include
duties of software custodians or librarians.
d. Using a program and data file check-in and check-out system and locking the designated
storage locations.
5. Computer systems that enable users to access data and programs directly through workstations
are referred to as
a. Online computer systems
b. Database management systems (DBMS)
c. Personal computer systems
d. Offline systems
6. Due to data sharing, data independence and other characteristics of database systems
a. General CIS controls normally have a greater influence than CIS application controls on
database systems.
b. CIS application controls normally have a greater influence than general CIS controls on
database systems.
c. General CIS controls normally have an equal influence with CIS application controls on
database systems.
d. CIS application controls normally have no influence on database systems.
7. For control purposes, which of the following should be organizationally segregated from the
computer operations function?
a. Data conversion
b. Minor maintenance according to a schedule
c. Systems development
d. Surveillance of CRT messages

*End of Pre-week Lectures*

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CPALE Auditing Syllabus – Overview

Fundamentals of Auditing and Assurance (4 items, 5.71%)

Pre-engagement
Risk Response and Conclusion and
Activities, Planning
Evidence Gathering Reporting (15 items,
and Risk Assessment
(11 items, 15.71%) 21.43%)
(27 items, 38.57%)

Governance,
Auditing in a CIS Attestation
Ethics and Quality
Environment (3 Services (5 items,
Management (5
items, 4.29%) 7.14%)
items, 7.14%)

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