PRE-WEEK LECTURE PART 1

THE PHILIPPINE ACCOUNTANCY ACT OF 2004 (RA 9298)

1. Which of the following is not one of the functions of the Board of Accountancy as specifically provided
under RA 9298?
a. To determine and prescribe minimum requirement leading to the admission of candidates to the CPA
examination.
b. To investigate violations of the Accountancy Law and the rules and regulations promulgated there
under.
c. To perform visitorial powers or review professional work of accounting practitioners in a general or
random basis.
d. After due process, to suspend, revoke, or reissue certificates of registration for causes provided for by
law by the rules and regulations promulgated therefore.
2. No person shall serve the Professional Regulatory Board of Accountancy for more than
a. 3 years c. 9 years
b. 6 years d. 12 years
3. The Accountancy Law provided that a CPA certificate may be suspended or revoked on grounds except
a. Immoral or dishonorable conduct
b. Gross negligence or incompetence in the practice of profession.
c. Refusal to accept an audit engagement with government cooperation.
d. Conduct discreditable to the accounting profession.
4. Pursuant to the BOA/PICPA rules of conduct, if a partner in a two-member partnership dies, the surviving
partner may continue practice as an individual under the existing firm title which includes the deceased
partner’s name
a. For a period of time not to exceed five years.
b. For a period of time not to exceed two years.
c. Indefinitely
d. Until the partnership payout to the deceased partner’s estate is terminated.
5. Which of the following is required for a partnership for public accountancy practice?
a. At least one of the partners must be a CPA
b. All partners must be a PICPA members
c. All partners must be CPAs
d. Firm name must contain names of partner only
6. The following statements relate to RA 9298 and its IRRs. Which statement(s) is(are) true?
I. Any person who shall violate RA 9298 or any of its implementing rules and regulations as promulgated
by the Board of Accountancy subject to the approval of the PRC, shall, upon conviction, be punished by a
fine of not less than fifty thousand pesos (P50,000),or by imprisonment for two (2) years, or both.
II. Those who failed to renew professional licenses for a period of four (4) continuous years from initial
registration, or from last renewal shall be declared delinquent.
III. The Quality Review Council (QRC) has 6 members including the chairman.
IV. Special/temporary permit may be issued by the Board of Accountancy subject to the approval of PRC
and payment of the fees the latter has prescribed and charged thereof to a foreign CPA called for
consolation or for a specific purpose which, in the judgment of BOA is essential for the development of
the country.
V. The APO shall submit its nominations with complete documentation to the commission not later than
60 days prior to the expiry of the term of an incumbent chairman or member.
a. IV and V only c. I, III, IV and V only
b. I, IV and V only d. I, II, IV and V only
7. The following statement relate to RA 9298 and its IRRs. Which statement(s) is(are) true?
I. A meaningful experience shall be considered as satisfactory compliance if it is earned in Public Practice
and shall include at least one year as audit assistant and at least two years as auditor in charge of the
audit engagement covering full audit functions of significant clients.
II. Individual CPAs, Firms or Partnerships of CPAs, including partners and staff members thereof shall
register with the BOA and the PRC.
III. According to RA 9298 and its IRRs, a Professional Identification Card bearing the registration number,
date of issuance, expiry date, duly signed by the chairperson of the PRC, shall likewise be issued to every
registrant renewable every three years.
IV. Practice in Education shall constitute in the person when he or she is involved in teaching of
accounting, auditing, management advisory services, accounting aspect of finance, business law, taxation
and other technically related subjects.
a. I, III and IV only c. II, III and IV only
b. I,II, and III only d. I, II, III and IV

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8. Which statement is(are) correct regarding CPE requirements for renewal of professional licenses?
I. The total CPE credit units required for CPAs shall be sixty (60) units for three (3) years, provided that a
minimum of fifteen (15) credit units shall be earned in each year.
II. A registered professional who is working abroad shall be temporarily exempted from compliance with
CPE requirements upon reaching the age of 65 years old.
III. A registered professional who is working abroad shall be temporarily exempted from compliance with
CPE requirement during his/her stay abroad, provided that he/she has been out of the country for at least
three
years immediately prior to the date of renewal.
IV. Those who failed to renew professional licenses for period of five (5) years continuous years from
initial registration or from last renewal shall be declared delinquent.
a. I and II only c. I, II and IV only
b. I and IV only d. I, II, III and IV only
9. The following statements relate to RA 9298 and its IRRs. Which statement(s) is(are) true?
I. Those who failed to renew professional licenses for period of five (5) years continuous years from initial
registration or from last renewal shall be declared delinquent.
II. The seal of a CPA shall be circular in form with the smaller circle within and in the upper portion of the
space between the circle shall be engraved the name of the individual CPA, firms or partnerships, as the
case may be, the lower portion thereof shall be engraved “CPA” and in the middle of the smaller circle
shall be engraved the CPA Registration Number of the individual CPA, proprietor of the firm and the
signing partner of the partnership.
III. The PRC-CPE Council shall be composed of a chairperson and three (3) members.
IV. Any candidates in two (2) complete Certified Public Accountant Board Examination shall be
disqualified from taking another set of examinations unless he/she submits evidence to the satisfaction of
the board that he/she enrolled in and complete at least twenty four (24) units of subjects given in the
licensure examination.
V. Within ninety (90) days after the effectivity of RA 9298, the Board subject to the approval of PRC and in
coordination with APO, shall adopt the provisions of RA 9298 and which shall take effect fifteen (15)
days following its publication in the Official Gazette of any major daily newspapers of general circulation.
a. I,II and V only c. I, III,IV and V only
b. I,IV and V only d. I, II, III,IV and V only

PREFACE TO AUDITING AND OTHER SERVICES (Revised)

PREFACE TO PSAs, PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS AND FRAMEWORK OF PSAs
1. The standards of the Auditing and Assurance Standards Council include Philippine standards on:
I. Quality control
II. Tax Engagements
III. Review Engagements
IV. Assurance Engagements
V. Consulting Engagements
a. I,II and III only c. I, III, and IV only
b. I,II and IV only d. I, II, III,IV and V only
2. Which statement is(are) correct regarding the pronouncement on AASC?
I. The exposure period allowed for each exposure draft of Engagement Standards and Statements to be
considered by the organizations and persons to whom it is sent for comment is generally 60 days.
II. Each final standard and statement shall be submitted to the PRC through the BOA for approval after the
effective date stated therein.
III. Practice Statements will have the same authority as the Engagement Standards.
a. I only c. II only
b. II and III only d. I, II and III only
3. Which statement is correct regarding assurance engagements?
a. It is an engagement in which a practitioner expresses a conclusion designed to enhance the degree of
confidence of the intended udders other that the responsible party about the outcome of the evaluation
or measurement of a subject matter against criteria.
b. Not all engagements performed by professional accountants are assurance engagements.
c. Whether a particular engagement is an assurance engagement will depend upon whether it exhibits all
the following elements – a three party relationship, a subject matter, suitable criteria, sufficient
appropriate evidence and a written assurance report.
d. All of the above statements are correct.
4. The subject matter of an assurance engagement may take many forms, including:
a. b. c. d.

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 Nonfinancial performance or condition Yes Yes Yes No
Behavior Yes Yes Yes Yes
Financial performance or condition Yes Yes No Yes
Physical characteristics Yes No No No
Systems and Processes Yes No Yes Yes
5. The characteristics for determining whether criteria are suitable include:
a. b. c. d.
Relevance Yes Yes Yes Yes
Reliability Yes Yes Yes Yes
Completeness Yes Yes No Yes
Neutrality Yes No No Yes
Comparability Yes Yes No No
Feedback value Yes No No No
6. Which of the following is incorrect regarding the three party relationship element of assurance
engagement?
a. The intended user is generally the addressee of the professional accountant’s report.
b. The responsible party and the intended user will often be from separate organizations.
c. The responsible party may also be one of the intended users.
d. All of the above statements are correct
7. The objective of an agreed-upon procedures engagement
a. Is to enable the auditor to express an opinion whether the financial statements are prepared in all
material respects, in accordance with an identified financial reporting framework.
b. Is to enable the auditor to state whether, on the basis of procedure which do not provide all the
evidence that would be required in an audit, anything has come to the auditor’s attention that causes the
auditor to believe that the financial statements are not prepared un all material respects, in accordance
with an identified framework.
c. Is to carry out those procedures of an audit nature to which the auditor and the entity and any
appropriate third parties have agreed and to report on factual findings.
d. Is to use accounting expertise as opposed to auditing expertise to collect, classify and summarize
financial information.
8. Which statement is incorrect regarding related services?
a. Related services comprise agreed-upon procedures and compilation.
b. Audits and reviews are designed to enable the auditor to provide reasonable assurance and limited
assurance, respectively.
c. Engagement to undertake agreed-upon procedures is not intended to enable the auditor to express
assurance.
d. In a consultancy engagement, the accountant is engaged to use accounting expertise to collect,
classify and summarize financial information.
9. The Framework of PSA (PSA 120) applies to
a. Taxation c. Agreed upon procedures
b. Consultancy d. Accounting advice
10. A pervasive characteristic of a CPA’s role in a Management Consulting Services engagement is that of
being a(n)
a. Objective advisor c. Computer specialist
b. Independent practitioner d. Confidential reviewer
11. Which one of the following is not a logical function of a CPA in public accounting practice?
a. Attest function
b. Supervision of internal audit staff
c. Tax practice
d. Management consulting services
12. Which of the following statements is (are) incorrect regarding assurance services?
a. Engagement risk is the risk that the practitioner will express an inappropriate conclusion that the
subject matter conforms in all material respects will suitable criteria.
b. All components of the engagement risk model will be significant for all assurance engagements.
c. The extent to which the practitioner considers the relevant components of engagement risk will be
affected by the engagement circumstances.
d. Business risk is not part of engagement of Philippine Standard on Assurance Engagements.
13. Which of the following statements is (are) incorrect regarding assurance services?
a. Assurance services can be provided either on information or processes.
b. The third party who receives the assurance generally does not pay for the assurance received.

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 c. Assurance services always involve a report by one person to a third party on which an independent
organization provides assurance.
d. All o f the above.
14. In performing an attestation engagement, a CPA typically
a. Supplies litigation support services
b. Assesses control risk at a low level
c. Expresses a conclusion about an assertion
d. Provides management consulting advice

CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS IN THE PHILIPPINES

PART B: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE
Application of Principles to Specific Situations
1. If a member of the assurance team, or their immediate family member, has direct financial interest, or a
material indirect financial interest, in the assurance client, the self-interest threat created would be so
significant they only safeguards available to eliminate the threat or reduce it to an acceptable level would
be due to (choose the correct one)
a. Dispose of the direct financial interest prior to the individual becoming a member of the assurance
team.
b. Dispose of the indirect financial interest in total prior to the individual becoming a member of the
assurance team.
c. Dispose of a sufficient amount of the indirect financial interest so that the remaining interest is no
longer material prior to the individual becoming a member of the assurance team.
d. Limit the participation of the member of the assurance team.
2. If a firm, or a network firm, has a direct financial interest in an audit client of the firm, the self-interest
threat created would be so significant no safeguard could reduce the threat to an acceptable level. The
action appropriate to permit the firm to perform the engagement would be to
a. Dispose the financial interest
b. Dispose of a sufficient amount of it so that the remaining interest is no longer material.
c. Either a or b.
d. Neither a nor b.
3. The following loans and guarantees would not create a threat to independence, except
a. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar institution, to the
firm, provided the loan is made under normal lending procedures, terms and requirements and the loan is
immaterial to both the firm and the assurance client.
b. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar institution, to a
member of the assurance team or their immediate family, provided the loan is made under normal
lending procedures, terms and requirements.
c. Deposits made by, or brokerage accounts o, a firm or a member of the assurance team with an
assurance client that is a bank, broker or similar institution, provided the deposit or account is held under
normal commercial terms.
d. If the firm, or a member of the assurance team, makes a loan to an assurance client, that is not a
bank or similar institution, or guarantees such as assurance client’s borrowing.
4. Examples of close business relationships that pay create self-interest and intimidation threat least likely
include
a. Having a material financial interest in a joint venture with the assurance client or a controlling owner,
director, officer or other individual who performs senior managerial functions for that client.
b. Arrangements to combine one or more services or products of the firm with one or more services or
products of the assurance client and to market the package with reference to both parties.
c. Distribution or marketing arrangements under which the firm acts as a distributor or marketer of the
products or services of the firm.
d. The purchase of goods and services from an assurance client by the firm (or from an audit client by a
network fir,) or a member of the assurance team; provided the transaction is in the normal course of
business and on arm’s length basis.
5. Family and personal relationships between a member of the assurance team and director, an officer or
certain employees, depending on their role, of the assurance client, least likely create
a. Self-interest threat c. Intimidation threat
b. Self-review threat d. Familiarity threat
6. A director, an officer or an employee of the assurance client in a position to exert direct and significant
influence over the subject matter of the assurance engagement has been a member of the assurance
team or partner of the firm. The situation least likely create
a. Self-interest threat c. Intimidation threat

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 b. Self-review threat d. Familiarity threat
7. A former officer, director, or an employee of the assurance client serves as a member of the assurance
team. This situation will least create
a. Self-interest threat c. Intimidation threat
b. Self-review threat d. Familiarity threat
8. The following activities would generally create self-interest or self-review threats that are so significant
that only avoidance of the activity or refusal to perform the assurance engagement would reduce the
threats to an acceptable level, except
a. Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf of
the assurance client, or having the authority to do so.
b. Determining which recommendation of the firm should be implemented.
c. Reporting in a management role, to those charged with governance.
d. Providing technical assistance and advice on accounting principles for audit clients.
9. If firm, or network firm, personnel providing such assistance make management decisions, the self-review
threat created could not be reduced to an acceptable level by any safeguards. Examples of such
managerial decisions include the following, except
a. Determining or changing journal entries; or the classifications for accounts or transactions or other
accounting records without obtaining the approval of the audit clients.
b. Authorizing or approving transactions.
c. Preparing source documents or originating data (including decisions on evaluation assumptions), or
making changes to such documents or data.
d. Assisting on audit client in resolving account reconciliation problems.
10. The recruitment of senior management for an assurance client, such as those in a position to affect the
subject of the assurance engagement may least likely create
a. Self-interest threat c. Intimidation threat
b. Advocacy threat d. Familiarity threat
11. Fees calculated on a predetermined basis relating to the outcome or result of a transaction or the result
of the work performed
a. Contingent fees c. Flat sum fees
b. Retainer fees d. Per diem fees
12. A client company has not paid its 2003 audit fees. According to the Code of Professional Conduct, for the
auditor to be considered independent with respect to the 2004 audit, the 2003 audit fees must be paid
before the
a. 2003 report is issued c. 2004 report issued
b. 2004 field work is started d. 2005 field work is started
13. Under the Code of Professional Ethics, which of the following may a practicing CPA do in connection with
educational seminars?
a. Send announcements about his appearance on a seminar program to non-clients or invite them to
attend.
b. Sponsor a seminar and send invitations to non-clients.
c. Allow himself to be listed as a tax expert on the seminar announcement.
d. Distribute firm literature at the seminar to non–clients on a relevant topic being discussed at the
seminar.
14. A CPA, wrote an article for publication in PICPA Accountants Journal. The Code of Professional Ethics
would be violated if the CPA allowed the article to state that the CPA was a
a. Member of PICPA
b. Professor at a school of professional accountancy
c. Partner in a national CPA firm
d. Practitioner specializing in providing tax services
15. Ethically, the auditor could
a. Advertise only as to his expertise in preparing income tax returns.
b. Base his audit fee on a percentage of the proceeds of his client’s stock issue.
c. Own preferred stock in a corporation which is an audit client.
d. Perform an examination for a financially distressed client at less than his customary fees.
16. Which of the following legal situations would be considered to impair the auditor’s independence?
a. An expressed intention by the present management to commence litigation against the auditor alleging
deficiencies in audit work of the client, although the auditor considers that there is only a remote
possibility that such a claim will be filed.
b. Actual litigation by the auditor against the client for an amount not material to the financial statements
of the client arising out of disputes as to billing for management advisory services.

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 c. Actual litigation by the auditor against the present management alleging management fraud or
deceit.
d. Actual litigation by the client against the auditor for an amount not material to the auditor or to the
financial statements of the client arising out of disputes as to billing for tax services.
17. Which of the following is not prohibited by the Code of Professional Ethics for CPAs?
a. Advertising and solicitation of client.
b. Payment of commission to obtain a client.
c. Receiving a contingent fee on a tax case before the Bureau of Internal Revenue.
d. Offering employment to a staff member of another CPA without first informing the CPA.
18 The CPA in public practice violates the Code of Professional Ethics for CPAs if he accepts a fee which was
a. Fixed by a public authority.
b. Based on a price quotation submitted in competitive bidding.
c. Determined based on the results of judicial proceedings.
d. Payable after a specified finding was obtained.
19. Warner, CPA, places a 2” x 2” display advertisement in a national financial newspaper. The
advertisement reads: “Wanted: Outgoing CPA with partnership potential. Must have 5 years experience in
a tax department of a CPA firm. Reply Box 1940.”Under the Code of Professional Ethics such an
advertisement would
a. Violate the provisions dealing with advertising.
b. Violate the provisions dealing with specialization.
c. Violate the provisions dealing with encroachment.
d. Not be a violation.
20. A practicing CPA is allowed by the CPA Code of Ethics to do the following, except
a. Announce the change in office location in a newspaper.
b. List his first name in the building lobby directory in good taste and modest size.
c. Include his tax account number and membership in PICPA on his stationery.
d. List his office telephones in the PLDT directory in box or bold type.
21. Inclusion of which of the following in a promotional brochure published by a CPA firm would be most
likely to result in a violation of the BOA/PICPA rules of conduct?
a. Reprints of newspaper articles which are laudatory with respect to the firm’s expertise.
b. Services offered and fees for such services, including hourly rates and fixed fees.
c. Educational and professional attainments of partners.
d. Testimonials and endorsements
22. May a CPA hire for the CPA’s public firm a non-CPA system analyst who specializes in developing
computer systems?
a. Yes, provided the CPA is qualified to perform each of the specialist’s tasks.
b. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist’s end product.
c. No, because non-CPA professionals are not permitted to be associated with CPA firms in public
accountants.
d. No, because developing computer systems is not recognized as a service performed by public
accountants.
23. A violation of the profession’s ethical standards would most likely occur when a CPA who
a. Is also admitted to the Bar represents on letterhead to be both an attorney and a CPA.
b. Writes a newsletter on financial management also permits a publishing company to solicit subscriptions
by direct mail.
c. Is controller of a bank permits the bank to use the controller’s CPA title in the listing of officers in its
publications.
d. Is the sole shareholder in a professional accountancy corporation that uses the designation “and
company” in the firm title.
24. Which of the following acts by a CPA who is not in public practice would most likely be considered a
violation of the ethical standards of the profession?
a. Using the CPA designation without disclosing employment status in connection with financial
statements issued for external use by the CPA’s employer.
b. Distributing business cards indicating the CPA designation and the CPA’s title and employer.
c. Corresponding on the CPA’s employer’s letterhead, which contains the CPA designation and the CPA’s
employment status.
d. Compiling the CPA’s employer’s financial statements and making reference to the CPA’s lack of
independence.
25. The Rules of Conduct will ordinarily be considered to have been violated when the professional
accountant represents that specific consulting services will be performed for a stated fee and it is
apparent at the time of the representation that the

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 a. Actual fee would be substantially higher.
b. Actual fee would be substantially lower than the fees charged by other professional accountants for
comparable services.
c. Fee was a competitive bid.
d. Professional accountant would not be independent.
26. Legacy Commercial Inc. engages the services of Mr. C Dimalanta, CPA, to make a project study on the
expanded food vending operations of the corporation with the corresponding staffing and compensation
package for its executive staff. Dimalanta, however, has primarily auditing expertise and only in general
merchandising operations. Mr. Dimalanta may properly
a. Accept the engagement and carry it out consistent with GAAS.
b. Accept the engagement but exercise due professional care.
c. Accept the engagement and acquire the necessary competence or consult with established
authorities.
d. Decline the engagement for lack of experience or competence in an entirely new line of specialization.
27. After beginning an audit of a new client, Larkin, CPA, discovers that the professional competence
necessary for the engagement is lacking. Larkin informs management is lacking. Larkin informs
management of the situation and recommends another CPA and management engages the other CPA.
Under these circumstances
a. Larkin’s lack of competence should be construed to be a violation of GAAS.
b. Larkin may request compensation from the client for any professional services rendered to it in
connection with the audit.
c. Larkin’s request for a commission from the other CPA is permitted because a more component audit
can now be performed.
d. Larkin may be indebted to the other CPA since the other CPA can collect from the client only the
amount the client originally agreed to pay Larkin.
28. On an audit engagement performed by a CPA firm with one office, at the minimum, knowledge of the
relevant professional accounting and auditing standards should be held by
a. The auditor with final responsibility for the audit.
b. All professional working upon the audit.
c. All professional working upon the audit and the partner in charge of the CPA firm.
d. All professionals working in the office.
29. A CPA who is seeking to sell an accounting practice must
a. Not allow a peer review team to look at working papers and tax returns without permission from the
client prior to consummation of the sale.
b. Not allow a prospective purchaser to look at working papers and tax returns without permission
from the client.
c. Give all working papers and tax returns to the client.
d. Retain all working papers and tax returns for a period of time sufficient to satisfy the statute
limitations.
30. Smith, CPA, issued an “except for” opinion on the financial statements of the Wald Company for the year
ended December 31, 2005. Wald has engaged another firm of CPAs to make a second audit. The local
bank has knowledge of Smith’s audit and has asked Smith to explain why the financial statements and his
opinion have not been made available.
a. Smith cannot provide the bank with information about Wald under any circumstances.
b. If Wald consents, Smith may provide the bank with information concerning Wald.
c. If the other form of CPAs consents, Smith may provide the bank with information concerning Wald.
d. The only way the bank can obtain information concerning Smith’s audit is to obtain it by subpoena.
31. The CPA should not undertake an engagement if his fee is to be based upon
a. A percentage of audited net income
b. Per diem rates plus expenses
c. The findings of a tax authority
d. The complexity of the service rendered
32. According to the profession’s ethical standards, an auditor would be considered independent in which of
the following instances?
a. The client owes the auditor fees for two consecutive annual audits.
b. The auditor’s checking account, which is fully insured by a PDIC, is held at a client financial
institution.
c. The auditor is also an attorney who advises the client as its general counsel.
d. An employee of the auditor donates service as treasurer of a charitable organization that is a client.
33. A CPA purchased a stock in a client corporation and placed it in a trust as an educational fund for the
CPA’s minor child. The trust securities were not material to the CPA but were material to the child’s

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 personal net worth. Would the independence of the CPA be considered to be impaired with respect to
the client?
a. No, because the CPA would not be considered to have a direct financial interest in the client.
b. No, because the CPA would not be considered to have a material indirect interest in the client.
c. Yes, because the stock would be considered a direct financial interest and consequently, materially is
not a factor.
d. Yes, because the stock would be considered a indirect financial interest that is material to the CPA’s
child.
34. Which of the following is required if the professional accountant uses experts who are not professional
accountants?
a. Experts who are not professional accountants need not be informed of ethical requirements because
they are not members of the Accountancy profession.
b. The ultimate responsibility for the professional service is assumed by the expert who is not a
professional accountant.
c. The professional accountant is discouraged to engage the services of experts who are not a professional
accountant.
d. The professional accountant must take steps to see that such experts are aware of ethical
requirements.
35. According to the BOA/PICPA Code of Professional Conduct, a member who has a financial interest in a
partnership that invests in a potential client is considered to have
a. An indirect financial interest in the client.
b. A direct financial interest in the client
c. No financial interest in the client
d. A partial financial interest in the client
36. In which of the following instances would the independence of the CPA not be considered to be
impaired? The CPA has been retained as the auditor or a brokerage firm
a. Which owe the CPA audit fees for more than one year
b. In which the CPA has a large active margin account
c. In which the CPA’s brother is the controller
d. Which owes the CPA audit fees for services in the current year and has just filed a petition for
bankruptcy
37. Which of the following most completely describes how independence has been defined by the
profession?
a. Performing an audit from the viewpoint of the public
b. Avoiding the appearance of significant interests in the affairs of an audit client.
c. Possessing the ability to act with integrity and objectivity
d. Accepting responsibility to act professionally and in accordance with a professional code of ethics.
38. The appearance of independence of a CPA, or that CPA’s firm, could be impaired if the CPA
a. Owns a unit in a cooperative apartment house where each unit has a vote in the cooperative, and the
CPA, who does not participate in the management, has been retained as the auditor for the cooperative.
b. Joins a trade association that is a client and serves in a non-management capacity.
c. Accepts a gift from a client.
d. None of the above.
39. An audit independence issue might be raised by the auditor’s participation in management advisory
services engagements. Which of the following statements is most consistent with the profession’s
attitude toward this issue?
a. Information obtained as a result of a consulting engagement is confidential to that engagement and
should not influence performance of the attest function.
b. The decision as to loss of independence must be made by the client based on the facts of the particular
case.
c. The auditor should not make management decisions for an audit client.
d. The auditor who is asked to review management decisions is also competent to make these decisions
and can do so without loss of independence.
40. The BOA/PICPA Code of Professional Conduct states, in part, that a CPA should maintain integrity and
objectivity. Objectivity in the Code refers to a CPA’s ability
a. To maintain an impartial attitude on all matters that come under the CPA’s review.
b. To independently distinguish between accounting practices that are acceptable and those that are not.
c. To be unyielding in all matters dealing with auditing procedures.
d. To independently choose between alternate accounting principles and auditing standards.
41. Which of the following fee arrangements is in violation of the BOA/PICPA Code of Professional Conduct?

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 a. A fee based on whether the CPA’s report on the client’s financial statements results in the approval
of a bank loan.
b. A fee based on the outcome of a bankruptcy proceeding.
c. A fee based on the nature of the service rendered and the CPA’s particular expertise instead of the
actual time spent on the engagement.
d. A fee based on the fee charged by the prior auditor.
42. Which of the following is prohibited by BOA/PICPA Code of Professional Conduct?
a. Use of the firm name that indicates specialization.
b. Practice of public accounting in the form of a professional corporation.
c. Use partnership name for a limited period by one of the partners in a public accounting firm after the
death or withdrawal of all other partners.
d. Holding 10 of 1,000 outstanding shares as an investment in a commercial corporation that performs
bookkeeping services.
43. The Principles of the BOA/PICPA Code of Professional Conduct
a. Are enforceable on BOA/PICPA members
b. Derive their authority from state boards of accountancy
c. Include the Code’s Rules of Conduct
d. Express each member’s responsibilities to the public, to clients, and to colleagues in the profession.
44. In which of the following circumstances would a CPA be bound to refrain from disclosing confidential
information obtained during a professional engagement?
a. The CPA is issued a summons enforceable by a court order that orders the CPA to present confidential
information.
b. A major stockholder of a client company seeks accounting information from the CPA after
management declined to disclose the information.
c. Confidential client information is made available as part of a quality review of the CPA’s practice by a
review team authorized by the BOA/PICPA.
45. Richard, XPA, performs accounting services for Norton Corporation. Norton wishes to offer shares to the
public and asks Richard to audit the financial statements. Richard refers Norton to Cruz, CPA, who is more
competent in the area of registration statements. Cruz performs the audit of Norton’s financial
statements and subsequently thanks Richard for the referral by giving Richard a portion of the audit fee.
Richard accepts the fee. Who, if anyone, has violated professional ethics?
a. Only Richard c. Only Cruz
b. Both Richard and Cruz d. Neither Richard nor Cruz
46. The BOA/PICPA Code of Professional Conduct would be violated if a member accepted a fee for services
and the fee was
a. Fixed by a public authority
b. Based on a price quotation submitted in competitive bidding.
c. Based on the result of judicial proceedings.
d. Payable after a specified finding was attained.

PART C: PROFESSIONAL ACCOUNTANTS IN BUSINESS

Threats and Safeguards
Compliance with the fundamental principles may potentially be threatened by a broad range of
circumstances. Many threats fall into the following categories:
a. Self-interest;
b. Self-review;
c. Familiarity; and
d. Intimidation

Examples of circumstances that may create self-interest threats for a professional accountant in business
include, but not limited to:
1. Financial interests, loans or guarantees.
2. Incentive compensation arrangements.
3. Inappropriate personal use of corporate assets.
4. Concern over employment security.
5. Commercial pressure from outside the employing organization.

Circumstances that may create self-review threats include, but are not limited to, business decisions or
data being subjects to review and justification by the same professional accountant in business responsible
for making those decisions or preparing that data.

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Examples of circumstances that may create familiarity threats include, but not limited to:
1. A professional accountant in business in a position to influence financial or non-financial reporting or
business decisions having an immediate or close family member who is n a position to benefit from that
influence.
2. Long association with business contacts influencing business decisions.
3. Acceptance of gift or preferential treatment, unless the value is clearly insignificant.

Examples of circumstances that may create intimidation threats include, but are not limited to:
1. Threat of dismissal or replacement of the professional accountant in business or a close immediate family
member over disagreement about the application of an accounting principle or the way in which financial
information is to be reported.
2. A dominant personality attempting to influence the decision making process, for example with regard to
the awarding of contracts or the application of an accounting principle.

RULES AND REGULATION ON ADVERTISING AND PUBLICITY FOR THE PROFESSIONAL ACCOUNTANTS IN
THE PHILIPPINES
Effectivity Date: August 9, 2008
1. Generally, advertising and publicity in any medium are acceptable provided:
-It has as its objective the notification to the public or such sectors of the public as are concerned, of
matters fact in a manner that is not false, misleading or deceptive.
-It is in good taste
-It is professionally dignified
-It avoids frequent repetition of, and any undue prominence being given to the name of the professional
accountant in public practice

2. The following are not allowed form advertising and publicity

a. Self-laudatory statements
b. Discrediting or attacking other firms or CPA practitioners
c. Referring to, using or citing actual or purported testimonials by third parties
d. Publishing and comparing fees with other CPAs or CPA Firms or comparing those services with those
provided by another firm or CPA practitioner
e. Giving too much emphasis on competitive differences
f. Using words or phrases which are hard to define and more difficult to substantiate objectively
g. Publishing services in billboard advertisements

Publicity is acceptable under the following circumstances:

a. Awards
b. Professional accountants seeking employment or professional business
c. Directories
d. Books, articles, Interviews, Lectures, Radio and television appearance
e. Training courses, seminars and, etc.
f. Booklet and Documents containing technical information
g. Stall recruitment
h. Publicity on behalf of clients
I. Brochures and firm Directories
j. Stationery and Nameplates
k. Announcements
l. Inclusion of the Name in professional accountants in public practice in a document issued by a client
m. Anniversaries
n. Websites

ACCREDITATION OF ACCOUNTING TEACHERS

1. Effectivity Date
2. Accreditation Requirements/Other Documents to be submitted
3. Provisional Accreditation
4. Expiration and Renewal of Accreditation

SEC REQUIREMENTS
1. The audited financial statements to be filed with the SEC shall be accomplished by
a. Management Report
b. Registration Statement

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 c. Statement of Management’s Responsibility for FS
d. Statement of the BOD’s Responsibility for the FS
2. The Statement of Management’s Responsibility to accompany the financial statements to be filed with the
SEC shall be signed by the
a. Chairman of the BOD c. CFO
b. CEO d. All of the above
3. All audited FS which are required to be filed with the SEC shall, at all time of first filing, be accompanied
by, in addition to the auditor’s report, a
a. Statement of Auditor’s Independence
b. Management of Auditor’s Independence
c. Certificate of Accreditation
d. Statement of Representation

CPA’s LEGAL LIABILITIES

1. While performing service for their clients, professionals have always had a duty to provide a level of care
which is
a. reasonable c. superior
b. greater than average d. Guaranteed to be free from error
2. The existence of extreme or unusual negligence, even though there was no intent to deceive or do harm,
is a(n)
a. fraud c. constructive fraud
b. gross fraud d. ordinary fraud
3. The failure of the auditor to meet PSAs
a. an accepted practice c. an evidence of negligence
b. a suggestion of negligence d. tantamount to criminal behavior
4. Which of the following statement(s) is(are) true?
a. Gross negligence may constitute constructive fraud
b. Constructive fraud is also termed recklessness.
c. Fraud requires the intent to deceive
d. All of the following are true
5. Which of the following if present would support a finding of fraud on the part of a CPA?
a. Privity of contract c. Reckless disregard
b. Intent to deceive d. Ordinary negligence
6. In rare cases auditors have been held liable for criminal acts. A criminal conviction against an auditor can
result only when it is demonstrated that the auditor
a. was negligent c. intended to deceive or harm others
b. was grossly negligent d. caused financial loss to an innocent third party
7. The financial issue to be resolved in cased involving alleged negligence is usually
a. the amount of the damages suffered by the users of the following statements.
b. whether to impose punitive damages on defendant
c. the level of care required to be exercised
d. whether defendant was involved in fraud
8. “Absence of reasonable care that can be expected of a person in a set of circumstances” is the description
of
a. Ordinary negligence c. Gross negligence
b. Constructive fraud d. Fraud
9. A CPA firm is considered independent when it performs which of the following services for a publicly-
traded audit client?
a. Serving as a member of the client’s board of directors.
b. Determining which accounting policies will be adopted by the client.
c. Accounting information system design and implementation
d. Tax return preparation ad approved by the board of directors.
10. The limitation of an auditor’s liability under contract law known as
a. privity of contract c. statutory liability
b, contributory liability d. common law liability
11. Privity of contract exists between the
a. auditor and client
b. auditor and third parties
c. auditor and the Securities and Exchange Commission
d. All of these

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12. As a consequence of his failure to adhere to PSAs in the course of his examination of the Leis
Corporation, Herman, CPA, did not detect the embezzlement of a material amount of funds by the
company’s controller. As a matter of common law, to what extent would Herman be liable to Leis
Corporation for losses attributable to the theft?
a. He would have no liability, since the ordinary examination cannot be relied upon to detect defalcations.
b. He would have no liability because privity of contract is lacking.
c. He would be liable for losses attributable to his negligence.
d. He would be liable only if it could be proven that he was grossly negligent.
13. In connection with the examination of financial statements independent auditor could be responsible for
failure to detect a material fraud if
a. statistical sampling techniques were not used on the audit engagement
b. the auditor planned the work in a hasty and inefficient manner
c. accountants performing important parts of the work failed to cover a close relationships between the
treasurer and the cashier
d. the fraud was perpetrated by one client employee, who reinvented the existing internal control
14. CPA is criminally liable if the
a. refuses to turn over the schedules or working papers prepared by the client staff to the client
b. performs an audit in negligent manner
c. intentionally allows an omission of a material fact required to be stated in a financial statement
d. was not able to submit the audited financial statements on time
15. The auditor’s legal liability to third parties under common law extends to:
a. All third parties for all acts of negligence.
b. All third parties for acts of fraud and gross negligence selected third parties for ordinary negligence.
c. All third parties for fraud; selected third parties for gross and ordinary negligence.
d. All third parties for acts of willful misconduct.
16. The auditor’s defense of contributors’ negligence is most likely to prevail when
a. third party injury has been minimal
b. the auditor fails to detect fraud resulting from management override of the control structure
c. client is privately held as contrasted with a public company.
d. undetected errors have resulted in materially misleading statements
17. Winslow Manufacturing Inc. sought a P2, 000,000 loan from National Lending Corporation. National
Lending insisted that Winslow submit audited financial statements before granting credit. Winslow
agreed. An independent auditor performed an audit and submitted an audit report to Winslow that was
to be used solely for the purpose of negotiating a loan from National. National, upon reading the audited
financial statements, decided in good faith not to extend the credit desired. Certain rations, used
routinely by National in reaching credit decisions, were judged insufficient. Winslow used copies of the
audited financial statements to obtain credit elsewhere. Despite complying with generally accepted
auditing standards, the independent auditor failed to discover a sophisticated embezzlement scheme
perpetrated by Winslow’s chief financial officer. The auditor is liable to
a. Third parties who relied on the audited financial statements to extend credit
b. Winslow to repay the audit fees because National did not extend credit
c. Winslow for any losses Winslow suffered as a result of failing to discover the embezzlement
d. None of the parties
18. The factor that distinguishes constructive fraud from actual fraud
a. materiality c. type of error or irregularity
b. quality of internal control d. intent
19. If a CPA recklessly abandons standards of due care and diligence while performing an audit, he or she
may be held liable to unknown third parties for:
a. Fraudulent misconduct c. Gross negligence
b. Gross misconduct d. Contributory negligence
20. In a common law action against an accountant, the lack of privity is a viable defense if the plaintiff
a. bases his action upon fraud
b. is the accountant’s client
c. is a creditor of the client who sues the accountant for negligence
d. can prove the presence of gross negligence which amounts to a reckless disregard for the truth
21. Which of the following conditions suggests an auditor’s negligence?
a. Failure to detect material error under conditions of week internal control.
b. Failure to detect collusive fraud perpetrated by members of middle management.
c. Failure to detect collusive fraud perpetrated by members of top management.
d. Failure to detect errors occurring outside the internal control structure.

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22. A third party sues a public accounting firm for negligence under common law on the basis of materially
false financial statements. Which of the following is the firm’s defense?
a. Lack of privity c. Lack of intent
b. Lack of reliance d. Contributory negligence
23. The factor that distinguishes constructive fraud from ordinary negligence is
a. materiality c. type of error or irregularity
b. intent d. Level of care
24. What type(s) of liability do CPA’s have in the Philippines?
Common Law Liability Statutory Law Liability
a. Yes Yes
b. Yes No
c. No Yes
d. No No
25. Conflict between financial statement users and auditors arises because of the
a. high cost of performing an audit
b. technical vocabulary which the auditor uses in the report
c. placement of the auditor’s report at the back of the client’s annual report where it is hard to locate
d. Expectation gap
26. Anyone identified to the auditor by name prior to the audit who is to be the principal recipient of the
auditor’s report is a
a. third party c. primary beneficiary
b, foreseen beneficiary d. secondary beneficiary
27. A CPA will most likely be negligent when he fails to:
a. Correct errors discovered in the CPA’s previously issued audit report.
b. Detect all of a client’s fraudulent activities.
c. Include a negligence disclaimer in the CPA’s engagement letter.
d. Warn a client’s customers of embezzlement that may be perpetuated by the client’s employees.

OTHER SERVICES AND REPORTS (PSA 800, PSAE 3400, PSRE 2400, PSRS 4400 and PSRS 4410)
1. Review engagements are often used by:
a. Small, owner-managed companies
b. mild-market public companies
c. large public companies
d. government agencies
2. The objective of a review of interim financial information is to provide the accountant with a basis for
reporting whether material modification should be made to conform with PFRSs .

The objective of a review of interim financial information is to provide the accountant with a basis or
reporting whether the financial statements are presented fairly in accordance with PFRSs.

The reporting of a review of interim financial information is to provide the accountant with a basis for
reporting whether the financial statements are presented fairly in accordance with standards of interim
reporting.
a. first and second statements are correct; third statement is not correct
b. first statement is correct; second and third statements are not correct
c. all above statements are not correct
d. first and third statements are correct; second statement is not correct
3. Which of the following procedures is not included in a review engagement on a non-public entity?
a. Inquiries of management
b. Inquiries regarding events subsequent to the balance sheet date
c. Any procedures designed to identify relationships among data that appear to be unusual.
d. A study and evaluation of internal control structure.
4. When engaged to compile the financial statements of a non-public entity, an accountant is required to
possess a level of knowledge of the entity’s accounting principles and practices. This requirement most
likely will include obtaining a general understanding of the
a. Stated qualifications of the entity’s accounting personnel
b. Design of the entity’s internal controls placed in operation
c. Risk factors relating to misstatements arising from illegal acts
d. Internal control awareness of the entity’s senior management
5. Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a non-public
entity. Before the completion of the audit, Tech requested Davis to change the engagement to a

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 compilation of financial statements. Before Davis agrees to change the engagement, Davis is required to
consider the
Additional audit effort necessary to Reason given for
Complete the audit Tech’s request
a. No No
b. Yes Yes
c. Yes No
d. No Yes
6. Which of the following procedures would an accountant least likely perform during an engagement to
review the financial statements of a non-public entity?
a. Observing the safeguards over access to and use of assets and records.
b. Comparing the financial statements with anticipated results in budgets and forecasts.
c. Inquiring of management about actions taken at the board of directors’ meeting.
d. Studying the relationships of financial statement elements expected to conform to predictable
patterns.
7. An accountant should perform analytical procedures during an engagement to
Compile a non-public entity’s Review a non-public entity
financial statements financial statements
a. No No
b. Yes Yes
c. Yes No
d. No Yes
8. Which of the following procedures would most likely be included in a review engagement of a non-public
entity?
a. Preparing a bank transfer schedule.
b. Inquiring about related-party transactions.
c. Assessing internal control.
d. Performing cutoff tests on sales and purchases transactions.
9. A summary of findings rather that assurance is most likely to be included in
a. Agreed-upon procedures report. c. Examination report
b. Compilation report d. Review report
10. Accepting an engagement to examine an entity’s financial projection most likely would be appropriate it
the projection were to be distributed to
a. All employees who work for the entity.
b. Potential stockholders who request a prospectus or a registration statement.
c. A bank with which the entity is negotiated for a loan.
d. All stockholders of record as of the report date.
11. When an accountant performs more than one level of service (for example, a compilation and review, or
a compilation and an audit) concerning the financial statements of a non-public entity, the accountant
generally should issue the report that is appropriate for
a. The lowest level of service rendered.
b. The highest level of service rendered.
c. A compilation engagement.
d. A review engagement.
12. Financial information based on assumptions about events that may occur in the future and possible
actions by an entity.
a. Historical financial information
b. Prospective financial information
c. Pro-forma financial information
d. Budgeted financial information
13. What is meant by a financial forecast?
a. A prospective financial statement that predicts an entity’s expected financial position, results of
operations and cash flows
b. A prospective financial statement that presents an entity’s expected financial position, results of
operations, and cash flows
c. A prospective financial statement that predicts an entity’s expected financial position, results of
operations, and cash flows based on one or more hypothetical assumptions
d. A prospective financial statement that presents an entity’s expected financial position, results of
operations, and cash flows based on one or more hypothetical assumptions

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14. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its
knowledge and behold, an entity’s expected financial position, results of operations, and cash flows. Such
prospective financial statements are known as
a. Pro-forma financial statements c. Partial presentations
b. Financial projections d. Financial forecasts
15. Which of the following is a prospective financial statement for general use upon which an accountant
may appropriately report?
a. Financial projection c. Pro-forma financial statements
b. Partial presentation d. Financial forecasts
16. A financial forecast consists of prospective financial statements that present an entity’s expected
financial position, results of operation, and cash flows. A forecast
a. Is based on the most conservative estimates.
b. Presents estimates given one or more hypothetical assumptions.
c. Unlike a projection, may contain range.
d. Is based on assumptions reflecting conditions expected to exist and courses of action expected to be
taken.
17. Which of the following statements concerning prospective financial statements is correct?
a. Only a financial forecast would normally be appropriate for limited use.
b. Only a financial projection would normally be appropriate for general use.
c. Any type of prospective financial statements would normally be appropriate for limited use.
d. Any type of prospective financial statements would normally be appropriate for general use.
18. An examination of a financial forecast is a professional service that involves
a. Compiling or assembling a financial forecast that is based on management’s assumptions.
b. Limiting the distribution of the accountant’s report to management and the board of directors.
c. Assuming responsibility to update management on key events for one year after the report’s date.
d. Evaluating the preparation of a financial forecast and the support underlying management’s
assumptions.
19. The party responsible for assumptions identified in the preparation of prospective financial statements is
usually
a. A third-party lending institution c. The reporting accountant
b. The client’s management d. The client’s independent auditor

Based on Special Purpose Framework

a. A tax basis of accounting for a set of financial statements that accompany an entity’s tax return
b. The cash receipts and disbursements basis of accounting for cash flow information that an entity may
be requested to prepare for creditors
c. The financial reporting provisions established by a regulator to meet the requirements of that regulator
d. The financial reporting provisions of a contract, such as bond indenture, a loan agreement or a project
grant
20. Reports are considered special reports when issued in connection with
a. Compliance with aspects of contractual provisions
b. Pro-forma financial presentations designed to demonstrate the effect of hypothetical transactions
c. Feasibility studies presented to illustrate an entity’s results of operations
d. Interim financial information reviewed to determine whether material modifications should be made to
conform with GAAP/PFRS
21. An auditor’s report would be designated as a special report when it is issued in connection with financial
statement that are
a. For an interim period and are subjected to a limited review.
b. Unaudited and are prepared from a client’s accounting records.
c. Prepared in accordance with cash basis of accounting
d. Purported to be in accordance with generally accepted accounting principles but do not include a
presentation of the Statement of Cash Flows.
22. An auditor’s report on financial statements prepared on the cash receipts and disbursements basis of
accounting should include the following
a. A reference to the financial statements that describes the cash receipts and disbursements basis of
accounting.
b. An opinion as to whether the financial statements are presented fairly in conformity with the cash
receipts and disbursements basis of accounting.
c. A statement that the audit was conducted in accordance with PSA.
d. All of the above.

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23. When reporting on financial statements prepared on the same basis of accounting used for income tax
purposes. The auditor should include in the report a paragraph that
a. Justifies the use of the income tax basis of accounting.
b. Emphasizes that the financial statements are not intended to have been audited in accordance with
PSA.
c. Refer to the authorized pronouncements that explain the income tax basis of accounting being used.
d. A reference to the note to the financial statements basis of accounting.
24. Comfort letters ordinarily are signed by the client’s
a. Independent auditor c. Audit committee
b. Underwriter of securities d. Senior management
25. Comfort letters ordinarily are ADDRESSED TO
a. Creditor financial institutions
b. The client’s audit committee
c. The Securities and Exchange Commission
d. Underwriters of securities
26. When an accountant issues to an underwriter a comfort letter containing comments on data that have
not been audited, (he underwriter most likely will receive
a. Negative assurance on capsule information.
b. Positive assurance on supplementary disclosures.
c. A limited opinion on pro-forma financial statements.
d. A disclaimer on prospective financial statements.
27. The WebTrust seal of assurance relates most directly to
a. Financial statements maintained on the Internet.
b. Health care facilities
c. Risk assurance procedures
d. Web sites
28. A CPA’s examination report relating to a WebTrust engagement is most likely to include
a. An opinion on whether the site is “hackproof”.
b. An opinion on whether the site meets the WebTrust criteria.
c. Negative assurance on whether the site electronically secure.
d. No opinion or other assurance but a summary of findings relating to the Web site.
29. An engagement in which a CPA considers security, availability, processing integrity, online privacy,
and/or system is most likely to considered which of the following types of engagements?
a. Internal control over financial reporting.
b. SysTrust
c. Web siteAssociate
d. WebTrust
30. A client’s refusal to provide a written assertion in a Trust Services engagement is most likely to result in
which of the following types of opinions?
a. Adverse c. Qualified
b. Disclaimer d. Unqualified with explanatory language
31. A type of audit the purpose of which is to determine whether the auditee is following specific procedures
or rules set down by some higher authority
a. Operational audit c. Financial audit
b. Compliance audit d. Management audit
32. A detailed examination of the utilization of the resources of the company, including the organization
structure to carry out objectives, to indicate areas of increased efficiency and possible cost reduction is
a. Internal audit c. Management audit
b. Audit of assets d. Financial audit
33. To make the internal audit department independent, he should report directly to the
a. Board of Director’s c. Stockholders
b. Audit committee d. Controller
34. The members of the Commission on Audit should
a. Be a member of the bidding committee of the agency.
b. Hold office for nine years without reappointment.
c. Be a commissioner and an associate commissioner.
d. Be a CPA or member of the Bar with ten years experience.
35. Besides expressing an opinion on the fairness of financial statement presentation, a government auditor
normally includes audit of effectiveness, compliance as well as
a. Internal control c. Mathematical accuracy
b. Economy d. Risk evaluation

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36. Operational auditing is mainly concerned about:
a. Past protection provided by current internal control
b. Failure improvements for management goals
c. Verification of fair presentation of financial data
d. Accuracy of data of financial records.
37. Governmental effectiveness (program) auditing seeks to determine whether the desired results are being
achieved and objectives are being met. The first step in the performance of such an audit would be:
a. Identify the legislative intent of the program being audited.
b. Evaluate the system used to measure results.
c. Determine the sampling frame to use in studying the system.
d. Collect and analyze quantifiable data.
38. Which of the following activities best describe the term operational audit?
a. Seeks out aspects of company operation in which introduction of proper controls would reduce
waste.
b. The job of implementing financial and accounting controls in a newly organizes company.
c. Constant review of the administrative controls as they relate to the operations of the company.
d. Verification of the fair presentation of a company’s results of operations.

GLOSSARY OF TERMS
1. The measure of the quality of audit evidence and its relevance to a particular assertion and its reliability.
a. Sufficiency c. Significance
b. Appropriateness d. Assurance
2. It serves as a set of instructions to assistants involved in the audit and as a means to control the proper
execution of the work.
a. Audit program c. Engagement letter
b. Overall audit plan d. Internal control questionnaire
3. Control risk is
a. The risk that the auditor gives an inappropriate audit opinion when the financial statements are
materially misstated.
b. The risk that a misstatement, that could occur in an account balance or class of transaction and that
could be material individually or when aggregated with misstatements in other balances or classes, will
not be prevented or detected and corrected on a timely basis by the accounting and internal control
systems.
c. The risk that an auditor’s substantive procedures will not detect a misstatement that exists in an
account balance or class of transactions that could be material, individually or when aggregated with
misstatements in other balances or classes.
d. The susceptibility of an account balance or class of transactions to misstatement that could be material,
individually or when aggregated with misstatements in other balances of classes, assuming that there
were no related internal controls.
4. Anomalous error means
a. An error that arises from an isolated event that has not recurred other than on specifically
identifiable occasions and is therefore not representative of errors in the population.
b. An error that the auditor expects to be present in the population.
c. The maximum error in a population that the auditor is willing to accept.
d. The possibility that the auditor’s conclusion, based on a sample may be different from the conclusion
reached if the entire population were subjected to the same audit procedure.
5. The current period’s auditor who did not audit the prior period’s financial statements is called
a. Predecessor auditor c. Incoming auditor
b. Other auditor d. Principal auditor
6. Continuing auditor is
a. The auditor who audited and reported on the prior period’s financial statements and continues as
the auditor for the current period.
b. A current period’s auditor who did not audit the prior period’s financial statements.
c. The auditor who was previously the auditor of an entity and who has been replaced by an incoming
auditor.
d. The auditor with responsibility for reporting on the financial statements of an entity when those
financial statements include financial information of one or more components audited by another
auditor.
7. They are not presented as complete financial statements capable of standing alone, but are an integral
part of the current period.
a. Corresponding figures

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 b. Comparative financial statements
c. Supplementary report
d. Notes of financial statements
8. A report, separate from the financial statements, in which an entity provides third parties with qualitative
information on the entity’s commitments towards the environmental aspects of the business, its policies
and targets in that field, its achievement in managing the relationship between its business processes and
environmental risk, and quantitative information on its environmental performance.
a. Environmental performance report
b. Annual report
c. Environmental risk
d. Special purpose audit report
9. Comprises officers and others who also perform senior managerial functions
a. Management c. Audit committee
b. Governance d. Board of directors
10. It exists when other information contradicts information contained in the audited financial statements.
a. Material inconsistency
b. Material misstatement of fact
c. Material weaknesses
d. Misstatement
11. The policies and procedures adopted by a firm to provide reasonable assurance that all audits done by
the firm are being carried out in accordance with the Objective and General Principles Governing an Audit
of Financial Statements.
a. Internal controls c. Peer review
b. Quality controls d. General controls
12. When an entity has the ability to control the other entity or exercise significant influence over the other
entity in making financial and operating decisions manifest:
a. Related parties c. Decentralization
b. Related services d. Centralized operations
13. Refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the
audit.
a. Scope of an audit c. Audit program
b. Scope of a review d. Scope limitation
14. It relates to materiality of the financial statement assertions affected by the computer processing.
a. Threshold c. Complexity
b. Relevance d. Significance
15. A report issued in connection with the independent audit of financial information other than an auditor’s
report on financial statements.
a. Special purpose auditor’s report c. Annual report
b. Compilation report d. Modified auditor’s report
16. Substantive procedures are tests performed to obtain audit evidence to detect material misstatements
in the financial statements. These include
a. Test of details of transactions c. Substantive analytical procedures
b. Test of details of balances d. All of the above.
17. Involves tracing a few transactions through the accounting system.
a. Test of controls c. Analytical procedures
b. Walk-through test d. Substantive procedures

PRE-WEEK LECTURE PART 2

OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FS (PSA 200)

1. The overall objectives of the auditor in conducting an audit of financial statements are:
I. To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatements, whether caused by fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence.
IV. To detect misstatements, whether due to fraud or error.
a. I and II only c. I, II, and III only
b. II and IV only d. I, II, III and IV
2. An audit is conducted on the premise that management and, where appropriate, those charged with
governance, have acknowledge and understand that they have responsibilities that are fundamental to

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 the conduct of an audit in accordance with PSAs. Which of the following is not one of those
responsibilities?
a. To provide the auditor unrestricted access to persons within the entity from which the auditor
determines it necessary to obtain audit evidence.
b. The preparation and presentation of financial statements in accordance with the pronouncements
issued by AASC.
c. The establishments and maintenance of internal control relevant to the preparation and presentation
of financial statements that are free from material misstatements, whether due to fraud or error.
d. To provide complete information to the auditor.

TERMS OF AUDIT ENGAGEMENTS (PSA 210 Redrafted)

1. Before accepting an audit engagement you as the successor auditor would least likely make specific
inquiries of the previous auditor regarding
a. Facts that might bear on the integrity of the management.
b. The degree of cooperation the previous auditor received from the client‘s lawyer.
c. An inquiry regarding disagreements with management as to auditing procedures.
d. The predecessor auditor’s understanding as to the reasons for the change of auditors.
2. Which of the following is least likely a source of information about a potential new audit client?
a. The predecessor auditor.
b. Management
c. Industry journal.
d. The new auditor’s permanent file.
3. Preliminary arrangements agreed to by the auditor and the client should be reduced to writing by the
auditor. The best place to set forth these arrangements is in
a. A memorandum to be place in the permanent section of the auditing working papers.
b. An engagement letter.
c. A client representation letter.
d. A confirmation letter attached to the constructive services letter.
4. Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a
new engagement letter to the client?
a. A recent change of partner and/or staff involved in the audit engagement.
b. A change in the terms of the engagement.
c. A recent change in client management.
d. A significant change in nature or size if the client’s business.
5. Arrangements concerning which of the following are least likely to be included in engagement letter?
a. A predecessor auditor.
b. Fees and billing.
c. CPA investment in client securities.
d. Other services to be provided in addition to the audit.
6. When the auditor believes that the understanding with the client has not been established, he or she
should ordinarily
a. Perform the audit with increased professional skepticism.
b. Decline to accept or perform the audit.
c. Assess control risk at the maximum level and perform a primarily substantive audit.
d. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud.
7. The following matters are generally included In an auditor’s engagement letter, except
a. Management’s responsibility for the financial statements
b. The scope of the audit.
c. The fact that because of the test nature and other inherent limitations of the audit, together with the
inherent limitations of internal control there is an unavoidable risk that even some material
misstatements may remain undiscovered.
d. The factors to be considered in setting preliminary judgments about materiality.

QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL FINANCIAL
INFORMATION AND OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS (PSOC 1 and PSA 220
Redrafted)
1. Quality control for CPA firm, as referred to in International Standard on Quality Control (ISQC) 1, applies to
a. Audits of historical financial information.
b. Audits of historical financial information and consulting services.
c. Audits of historical financial information and tax services.

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 d. Audits and reviews of historical financial information, and other assurance and related services
engagements.
2. Who should take responsibility for the overall quality on each audit engagement?
a. Engagement quality control review
b. Engagement partner
c. Engagement team
d. CPA firm
3. The engagement partner should take responsibility for the direction, supervision, and performance of the
audit engagement in compliance with professional standards and regulatory and legal requirements, and
for the auditor’s report that is issued to be appropriate in the circumstances. Supervision includes the
following, except,
a. Tracking the progress of the audit engagement.
b. Addressing significant issues arising during the audit engagement, considering their significant, and
modifying the planned approach appropriately.
c. Informing the members of the engagement team of their responsibilities.
d. Identifying matters for consultation or consideration by more experienced engagement team members
during the audit engagement.
4. Which of the following are elements of a CPA firm’s quality control that should be considered in
establishing its quality control policies and procedures?
Ethical Requirements Human Resources Engagement Performance
a. No Yes No
b. Yes No No
c. Yes Yes Yes
d. No No Yes
5. A successor auditor should request the new client to authorize the predecessor auditor to allow a review
of the predecessor’s
Engagement Letter Working Papers
a. Yes Yes
b. Yes No
c. No Yes
d. No No
6. Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor’s working
paper analyses relating to
Contingencies Balance Sheet Accounts
a. Yes Yes
b. Yes No
c. No Yes
d. No No
7. Williams & Co., a large international CPA firm, is to have an “external peer review”. T he peer review will
most likely be performed by
a. Audit review staff of the Securities and Exchange Commission
b. Audit review staff of the American Institute of Certified Public Accountants
c. Employees and partners of another CPA firm
d. Employees and partners o Williams & Co. who are not associated with the particular audits being
reviewed.
8. A CPA firms quality control procedures pertaining to the acceptance of the prospective audit client would
most likely include
a. Inquiry of management as to whether disagreements between the predecessor auditor and the
prospective client were resolved satisfactorily.
b. Inquiry of third parties, such as the prospective client’s bankers and attorneys, about information
regarding the prospective client and its management.
c. Consideration of whether sufficient competent evidential matter may be obtained to afford a
reasonable basis for opinion.
d. Consideration whether the internal control structure is sufficiently effective to permit a reduction in the
extent of required substantive tests.

THE AUDITOR’S RESPONSIBILITY TO CONSIDER FRAUD IN THE AUDIT OF FINANCIAL STATEMENTS (PSA 240
Redrafted)
1. An error in which an item is posted to the wrong personal account, or the incorrect calculation of an
amount constituting an original entry is a (n)
a. Error of omission c. Error of principles

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 b. Error of commission d. Compensating
2. Lapping is
a. Making the financial statements indicate a more favorable position by giving effect to transactions is a
period other than that in which these actually occurred.
b. Done to inflate the cash position or cover the theft of cash by depositing at the end of the accounting
period a check drawing on one bank account in another bank account without making a necessary
deduction in the balance of the first bank.
c. An irregularity that conceals cash shortages by a delay in recording cash collections, retaining a
customer’s payment on credit and covering up the shortage with subsequent cash receipts.
d. A kind of fraud committed by making entry os fictitious payments or failure to enter receipts.
3. In general, material fraud perpetrated by which of the following are most difficult to detect?
a. Cashier c. Internal auditor
b. Keypunch operator d. Controller
4. Certain management characteristics may heighten the auditor’s concern about the risk of material
misstatements. The characteristic that is least likely to cause concern is that management
a. Operating and financing decisions are made by numerous individuals.
b. Commits to unduly aggressive forecasts.
c. Has an excessive interest in increasing the entity’s stock price through use of unduly aggressive
accounting practices.
d. Is interested in inappropriate methods of minimizing earnings for tax purposes.
5. In a financial statement audit, the auditor should consider categories of fraud risk factors. The auditor is
most likely to presume that a high risk os a defalcation exists if
a. The client is a multinational company that does business in numerous foreign countries.
b. The client does business with several related parties.
c. Inadequate segregation of duties places an employee in a position to perpetrate and conceal thefts.
d. Inadequate employee training results in lengthy EDP exception reports month.
6. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of
intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low.
b. Insiders recently purchased additional shares of the entities.
c. Management places substantial emphasis in meeting earnings projection.
d. The rate of change in the entity’s industry is slow.
7. Which of the following circumstances most likely would cause an auditor to consider whether material
misstatements exist in an entity’s financial statements?
a. Management places little emphasis on meeting earnings projections.
b. The board of directors makes all major financing decisions.
c. Reportable conditions previously communicated to management are not corrected.
d. Transactions selected for testing are not supported by proper documentation.
8. Which of the following circumstances most likely would cause an auditor to believe that material
misstatements may exist in an entity’s financial statements?
a. Accounts receivable confirmation request yield significantly fewer responses than expected.
b. Audit traits of computer-generated transactions exist only for a short-time.
c. The chief financial officer does not sign the management representation letter until the last day of the
auditor’s fieldwork.
d. Management consults with other accountants about significant accounting matters.
9. Which of the following inquiries are auditors required to make of management regarding fraud?
a. Whether management has ever intentionally violated the securities law.
b. Whether management has knowledge of fraud that has been perpetrated on or within the entity.
c. Management’s attitude toward its employees.
d. Auditors are not required to make inquiries of management relating to fraud.
10. An entity’s financial statements were misstated over a period of years due to large amounts of revenue
being recorded in journal entries that involved debits and credits to an illogical combination of accounts.
The auditor could most likely have been alerted to this irregularity by
a. Scanning the general journal for unusual entries,
b. Performing a revenue cut-off test at year-end.
c. Tracing a sample of journal entries to the general ledger.
d. Examining documentary evidence os sales returns and allowances recorded after year-end.
11. Which of the following is most likely a fraud risk factor?
a. Management has a practice of conveying forecast of information to analysts, creditor, and other third
parties.
b. Turnover of management has been low throughout the preceding five-year period.

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 c. Several claims against the senior management are outstanding alleging a violation of the securities
law.
d. The company has shown the ability to generate a positive cash flow from operations, while reporting
earning s and earnings growth.
12. A Company s large restructuring charge on its income statement in 2004 and has experienced a
constantly rising earnings trend since that time. This would most nearly represent an example of
a. Using immaterial transactions to increase reported earnings to meet analysts’ expectations.
b. Big bath accounting.
c. Cookie jar reserves.
d. Creative acquisition accounting.
13. Which of the following is least likely a fraud risk factor?
a. Rapid changes are occurring in the client’s industry, including rapid product development.
b. The company has outsourced the portion of the internal audit function.
c. Management knows of, bat fails to correct, known reportable conditions on a timely basis.
d. Significant bank accounts bear interest of relatively low rates in tax-haven jurisdictions in which
company transacts other business operations.

NONCOMPLIANCE (PSA 250 Redrafted)

1. If the auditor considers an illegal act to be sufficiently serious to warrant withdrawing from the
engagement, then the auditor should
a. Notify all parties that may rely upon the company’s illegal acts.
b. Consult with legal counsel as to what other action, if any, should be taken.
c. Return all incriminating evidence and working papers to the client’s audit committee for follow-out.
d. Contact the successor auditor to make the successor aware of the possible consequences of relying on
management’s representations.
2. Example of the type of information that may come to the auditor’s attention that may indicate that
noncompliance with laws or regulations has occurred least likely include
a. Payments for unspecified services or loans to consultants, related parties, employees or government
employees.
b. Payments for goods or services made to the country from which the goods and services originated.
c. Purchasing at price significantly above or below market price.
d. Sales commissions or agent’s fees that appear excessive in relation to those ordinarily paid by the
entity or in its industry or to the services actually received.
3. Generally, the decision to notify parties outside the client’s organization regarding an illegal act is the
responsibility of the
a. Independent auditor c. Outside legal counsel
b. Management d. Internal auditors
4. Detection of noncompliance, regardless of materiality, requires considerations of the following:
a b c d
Integrity of management Yes Yes Yes No
Possible effect on other aspects if the audit Yes Yes No Yes
Legal determination of the act of non-compliance
5. Which statement is incorrect regarding the auditor’s consideration of laws and regulations in an audit of
financial statements?
a. When the auditor becomes aware of information concerning a possible instance of noncompliance, the
auditor should evaluate the possible effect on the financial statements.
b. If the auditor concludes that the noncompliance has a material effect on the financial statements, and
has not been properly reflected in the financial statements, the auditor should express a qualified or an
adverse opinion.
c. The auditor may withdraw from the engagement when the entity does not take the remedial action
that the auditor considers necessary in the circumstances, even when the noncompliance is not material
to the financial statements.
d. In order to plan the audit, the auditor should obtain a specific understanding of the legal and
regulatory framework applicable to the entity and the entity is complying with the framework.

PLANNING (PSA 300 Redrafted)

1. This involves establishing the overall audit strategy for the engagement and developing an audit plan, in
order to reduce audit risk to an acceptably low level.
a. Audit procedures
b. Audit planning
c. Audit program

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 d. Audit working papers
2. Which of the following would be least likely to be considered an audit planning procedure?
a. Use an engagement letter.
b. Develop the overall audit strategy.
c. Perform risk assessment.
d. Develop the audit plan.
3. The audit program usually cannot be finalized until the
a. Consideration of the entity’s internal control has been completed.
b. Engagement letter has been signed by the auditor and the client.
c. Reportable conditions have been communicated to the audit committee of the board of directors.
d. Search for unrecorded liabilities has been performed and documented.
4. In designing written audit programs, an auditor should establish specific audit objectives that related
primarily to the
a. Timing of audit procedures.
b. Cost-benefit of gathering evidence.
c. Selected audit techniques.
d. Financial statement assertions.
5. Which of the following procedures would an auditor most likely include in the initial planning of the
financial audit?
a. Obtaining a written representation letter from the client’s management.
b. Examining documents to detect illegal acts having a material effect on the financial statements.
c. Consider whether the client’s accounting estimates are responsible in the circumstances.
d. Determining the extent of involvement of the client’s internal auditor.
6. The audit plan sets the scope, timing and direction of the audit, and guides the development of the more
detailed audit strategy.

The overall audit strategy is more detailed than the audit plan and includes the nature, timing and extent
of audit procedures to be performed by engagement team members in order to obtain sufficient
appropriate audit evidence to reduce audit risk to an acceptable low level.
a. True, True c. False, False
b. True, False d. False, True
7. The nature and extent of planning will vary according to the following, except
a. Size of the auditing firm
b. Complexity of the entity
c. Auditor’s experience with the entity
d. Changes in circumstances that occur during the audit engagement,

AUDIT MATERIALITY (PSA 320)

1. Materiality should be considered by the auditor when
a. Determining the nature, timing and extent of auditor’s procedures.
b. Evaluating the effect of misstatements.
c. Both a and b
d. Neither a nor b

ASSESSING THE RISKS OF MATERIAL MISSTATEMENTS (PSA 315)

1. The type of transactions that ordinarily have a high inherent risk because they involve management
judgments or assumptions are referred to as
a. estimation of transactions
b. non-routine transactions
c. routine transactions
d. related-party transactions
2. Which of the following descriptions best describes inherent risk?
a. Auditors fail to discover a material misstatement in the course of their audit and do not modify their
audit opinion.
b. A company’s internal control fails to identify a material misstatement in a timely fashion.
c. Auditing procedures fail to find a material misstatement.
d. The possibility that a material misstatement will occur in any given account before considering
internal control.
3. While performing an audit, Sebastian decides to restrict the risk of misstatement to 3%. What must be the
acceptable level of detection risk be if inherent risk is 25% and control risk is 40%?
a. .03% c. 12%

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 b. 30% d. 33.3%
4. How frequently must an auditor test operating effectiveness of controls that appear to function as they
have in past years and on which the auditor wishes to rely in the current year?
a. Monthly
b. Each audit
c. At least every second audit
d. At least every third audit
5. An auditor generally tests the segregation of duties related to inventory by
a. Personal inquiry and observation.
b. Test counts and cutoff procedures.
c. Analytical procedures and invoice recomputation.
d. Document inspection and reconciliation.
6. An auditor may decide to assess control risk at the maximum level for certain assertions because the
auditor believes
a. Control policies and procedures are unlikely to pertain to the assertions.
b. The entity’s control environment, accounting system, and control procedures are interrelated.
c. Sufficient evidential matter to support the assertions is likely to be available.
d. More emphasis on tests is warranted.
7. The auditor faces a risk that the examination will not detect material errors which occur in the accounting
process. In regard to minimizing this risk, the auditor primarily relies on
a. Substantive tests c. Internal control
b. Compliance tests d. Statistical analysis
8. The auditor uses the assessed level of control risk (with the assessed level of inherent risk) to determine
the acceptable level of detection risk for financial statement assertions. As the acceptable level of
detection risk decreases, the auditor may do one or more of the following except change the
a. Nature of substantive tests to more effective procedures.
b. Timing of substantive tests, such as performing them at year-end rather than at interim date
c. Extent of substantive tests, such as using larger sample sizes.
d. Assurances provided by substantive tests to a lower level.
9. The auditor should perform which of the following as risk assessment procedure?
a. Analytical procedures c. Recalculation
b. Confirmation d. Reperformance
10. The concepts of audit risk and materiality are interrelated and must be considered together by the
auditor. Which of the following is true?
a. Audit risk is the risk that the auditor may unknowingly express a modified opinion when in fact the
financial statements are fairly stated.
b. The phrase in the auditor’s standard report “present fairly in all material respects, in conformity with
generally accepted accounting principles” indicates the auditor’s belief that the financial statements
taken as a whole are not materially misstated.
c. If misstatements are not important individually but are important in the aggregate, the concept of
materiality does not apply.
d. Material fraud but not material errors cause financial statements to be materially misstated.
11. In a financial statement audit, inherent risk represents the
a. Susceptibility of an account balance to error that could be material.
b. Risk that error could occur and not be detected by the auditor’s procedures.
c. Risk that error could occur and not be detected by the auditor’s procedures.
d. Risk that the auditor fails to modify materially misstated financial statements.
12. Which of the following statements about internal control is correct?
a. Properly maintained internal controls reasonably assure that collusion among employees cannot occur.
b. Establishing and maintaining internal control is the internal auditor’s responsibility.
c. exceptionally strong control allows the auditor to eliminate substantive tests of details.
d. The cost-benefit relationship should be considered in designing internal controls.
13. When an organization has strong internal control, management can expect various benefits. The benefit
least likely to occur is
a. Reduced cause of an external audit.
b. Elimination of employee fraud.
c. Improvement in the reliability and integrity of information for decision-making purposes.
d. some assurance of compliance with governmental regulations.
14. A potential business risk created by regulatory requirement may most likely include
a. Increased product liability
b. Increased legal exposure

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 c. The entity does not have the personnel or expertise to deal with the changes in the industry.
d. Loss of financing due to the entity’s inability to meet financing requirements.
16. The auditor should determine overall responses to address the risks of material misstatement at the
financial statement level. Such responses most likely include
a. Assigning less experienced staff.
b. Emphasizing to the audit team the need to maintain professional skepticism in gathering and
evaluating audit evidences.
c. Performing predictable further audit procedures.
d. Performing substantive procedures at an interim date instead of at period end.

THE AUDITOR’S PROCEDURES IN RESPONSE TO ASSESSED RISKS (PSA 330 Redrafted)

1. Which of the following is most likely to be a response to the auditor’s assessment that the risk of material
misstatement due to fraud for the existence inventory is high?
a. Observe test counts of inventory at certain locations on an unannounced basis.
b. Perform analytical procedures rather than taking test counts.
c. Request that inventories be counted prior to year-end.
d. Request that inventory counts at the various locations be counted on different dates so as to allow the
same auditor to be present at every count.
2. Which of the following is most likely to be an overall response to fraud risks identified in an audit?
a. Supervise members of the audit team less closely and rely more upon judgment.
b. Use less predictable audit procedures.
c. Only use certified public accountants on the engagement.
d. Place increased emphasis on the audit of objective transactions rather than subjective transactions.

ANALYTICAL PROCEDURES (PSA 520 Redrafted)

1. What type of analytical procedure would an auditor most likely use in developing relationships among
balance sheets accounts when reviewing the financial statements of a nonpublic entity?
a. Trend analysis c. Ratio analysis
b. Regression analysis d. Risk analysis
2. Analytical procedures, which means the analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationships that are inconsistent with other relevant information or
which deviate from amounts, are not required to be applied
a. At the planning stage of the audit
b. As substantive procedures
c. Overall review stage of the audit
d. All of the above
3. Analytical procedures are
a. Substantive test designed to evaluate a system of internal control.
b. Tests of controls designed to evaluate the validity of management’s representation letter.
c. Substantive tests designed to evaluate the reasonableness of financial information.
d. Tests of controls designed to evaluate the reasonableness of financial information.
4. Which of the following statements concerning analytical procedures is true?
a. Analytical procedures may be omitted entirely for some financial statement audit.
b. Analytical procedures used in planning used in planning the audit should not use nonfinancial
information.
c. Analytical procedures usually are effective and efficient for tests of controls.
d. Analytical procedures alone may provide the appropriate level of assurance for some assertions.
5. Which of the following nonfinancial information would an auditor most likely consider in performing
analytical procedures during the planning phase of an audit?
a. Square footage of selling space.
b. Turnover of personnel in the accounting department.
c. Objectivity of audit committee members.
d. Management’s plans to repurchase stock.
6. The auditor observed that the long term debt increased from the prior year, but interest expense
increased a large- than-proportionate amount than long-term debt. Which of the following is the most
likely explanation for this situation?
a. Interest expense decreased, as compared to the prior year.
b. Short-term borrowing was refinanced on a long term basis at the same interest rate.
c. Short-term borrowing was financed on a long term at lower interest rate.
d. Short-term borrowing was refinanced on, a long term basis at higher interest rate.

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7. The application of analytical procedures is based on the expectation that relationships among data exit
and continue in the absence of known conditions to the contrary. Which of the following items tend to be
the most predictable foe purposes of analytical procedures applied as substantive tests?
a. Relationships involving balance sheet accounts.
b. Transactions subject to management discretion.
c. Relationships involving income statement accounts.
d. Data subject to audit testing in the prior year.
8. 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. Irregularities exist among the relevant account balances.
b. Internal control activities are not operating effectively.
c. Additional tests of details are required.
d. The communication with the audit committee should be revised.
9. As a result of analytical procedures, the independent auditor determines that the gross profit percentage
has declined from 30% in the preceding year to 20% in the current year. The auditor should
a. Document management’s intentions with respect to plans for reversing this trend.
b. Evaluate management’s performance in causing this decline.
c. Require footnote disclosure.
d. Consider the possibility of a misstatement in the financial statements.
10. An auditor’s decision either to apply analytical procedures as substantive tests or to perform tests of
transactions and account balances usually is determined by the
a. Availability of data aggregated at a high level.
b. Relative effectiveness and efficiency of the tests.
c. Timing of tests performed after the balance sheet data.
d. Auditor’s familiarity with industry trends.
11. An auditor’s preliminary analysis of accounts receivable turnover revealed the following rates;
2005 2004 2003
4.3 6.2 7.3
Which of the following is the most likely cause of the decrease in accounts receivable turnover?
a. Increase in the cash discount offered
b. Liberalization of credit policy
c. Shortening of due date terms
d. Increasing cash sales
12. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexpected decrease in
the ratio of gross profit to sales suggests which of the following possibilities?
a. Unrecorded purchases
b. Unrecorded sales
c. Merchandise purchases being charged to selling and general expense
d. Fictitious sales
13. 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 statements 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.
14. The investigation of unusual fluctuations and relationships ordinarily begins with
a. Identification significant fluctuations or relationships that are inconsistent with other relevant
information or that deviate from predicted amounts.
b. Inquiries of management
c. Comparing management responses with the auditor’s knowledge of the business and other evidence
obtained during the course of the audit.
d. Consideration of the need to apply other audit procedures.
15. The primary objective of analytical procedures used in the final review stage of an audit is to
a. Obtain evidence from details tested 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 expertise.
16. Analytical procedures used in the overall review stage of an audit generally include
a. Gathering evidence concerning account balances that have not changed from the prior year.
b. Retesting control procedures that appeared to be ineffective during the assessment of the control risk.
c. Considering unusual or unexpected account balances that were not previously identified.
d. Performing tests of transactions to corroborate management’s financial statements assertions.

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 AUDIT CONSIDERATIONS RELATING TO ENTITIES USING SERVICE ORGANIZATIONS (PSA 402)
1. When the auditor considers that the service organization activities are significantly relevant to the audit
and he concludes that it would be efficient to obtain evidence from tests of controls, such evidence may
be obtained by, except
a. Visiting the service organization
b. Performing tests of client’s control activities of the service organization
c. Review the service contract between the client and the service organization
d. Obtaining a service organization auditor’s report that expresses an opinion as to the operating
effectiveness of the service organization’s accounting and internal control systems for the processing
applications relevant to the audit.
2. Which of the following is least likely entitled to the report of the service organization auditor on the
effectiveness of the service organization?
a. Service organization’s management
b. Service organization’s stockholders
c. Service organization’s customer
d. Client auditors

COMMUNICATING WITH THOSE CHARGED EITH GOVERNANCE (PSA 260)

1. Which of the following statement is correct concerning an auditor’s required communication with an
entity’s audit committee?
a. This communication is required to occur before the auditor’s report on the financial statements is
issued.
b. This communication should include discussion of any significant disagreements with management
concerning the financial assertions.
c. Any significant matter communicated to the audit committee also should be communicated to
management.
d. Significant audit adjustments proposed by the auditor and recorded by management need not be
communicated by the audit committee
2. Which statement is incorrect regarding the auditor’s communications of audit matters with those charged
with governance?
a. The auditor’s communications of matters include all audit matters of governance interest.
b. An audit of financial statements is not designed to identify all matters that may be relevant to those
chargd with governance.
c. The auditor’s communications with those charged with governance may be made orally or in writing.
d. None of the above.
3. Which of the following statement is correct concerning significant deficiencies in an audit?
a. An auditor is required to search for significant deficiencies during an audit.
b. All significant deficiencies are also considered to be material weakness.
c. An auditor may communicate significant deficiencies during a n audit or after the audit’s completion.
d. An auditor may report that no significant deficiencies were noted during an audit.
4. An auditor would least likely initiate a discussion with those charged with governance of an adult client
concerning
a. The methods used to account for significant unusual transactions.
b. The maximum peso amount of misstatements that could exist without causing financial statements
to be materially misstated.
c. Indications of fraud and illegal acts committed by a corporate officer that were discovered by the
auditor.
d. Disagreements with managements as to accounting principles that were resolved during the current
year’s audit.
5. Which of the following matters is an auditor required to communicate to an entity’s audit committee?
I. Disagreements with management about matters significant to the entity’s financial statements that
have been satisfactorily resolved.
II. Initial selection of significant accounting policies in emerging areas that lack authoritative guidance.
a. I only b. II only c. Both I and II d. Neither I nor II
6. Should an auditor communicate the following matters to those charged with governance of an audit
client?
Management’s audit Management consultation
adjustments with other accountants
recorded about Significant
by the entity accounting matters

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 a. yes yes
b. yes no
c. no yes
d. no no

AUDIT OBJECTIVES, PROCEDURES, EVIDENCE AND WORKING PAPERS (PSA 500 revised and 230 revised)
1. Audit information usually considered relevant when it is
a. Derive through valid statistical sampling
b. Objective and unbiased
c. Factual, adequate, and convincing
d. Consistent with the audit objectives.
2. To be appropriate, audit evidence should be either reliable or relevant, but need to be both.

The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for
omitting the test.

The client’s accounting records can be sufficient audit evidence to support the financial statements.
a. First and second statements are not correct; the third statement is correct.
b. All above statements are not correct.
c. First and third statements are not correct; the second statement is correct.
d. First statement is correct; the second and third statements are not correct.
3. A client uses a suspense account for unresolved questions whose final accounting has not been
determined.
If a balance remains in the suspense account at year-end, the auditor would be most concerned about
a. Suspense debits that management believes will benefit future operations.
b. Suspense debits that the auditor verifies will have realizable value of the client.
c. Suspense credits that management believes should be classified as “Current liability”.
d. Suspense credits that the auditor determines to be customer deposits.
4. An auditor most likely would make inquiries of production and sales personnel concerning possible
obsolete or slow-moving inventory to support management’s financial statement assertion of
a. Valuation c. Existence
b. Rights d. Presentation
5. An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion
most likely related to the auditor’s objective to obtain evidence about the financial statement assertions
regarding inventory, including presentation and disclosure and
a. Valuation c. Existence
b. Completeness d. Rights
6. 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
a. Rights c. Existence
b. Completeness d Valuation
7. An auditor most likely would analyze inventory turnover rates to obtain evidence concerning
management’s assertions about
a. Existence c. Presentation
b. Rights d. Valuation
8. In auditing accounts payable, an auditor’s procedures most likely would focus primarily of management’s
assertion of
a. Existence
b. Presentation and disclosure
c. Completeness
d. Valuation
9. Which of the following factors most likely would affect an auditor’s judgment about the quantity, type and
content of the auditor’s working papers?
a. The assessed level of control risk.
b. The likelihood of a review by a concurring (second) partner.
c. The number of personnel assigned to the audit.
d. The content of the management representation letter.
10. The permanent file of an auditor’s working papers generally would not include
a. Bond indenture agreements.

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 b. Lease agreements.
c. Working trial balance.
d. Flowchart of internal control.
11. Which statement is correct concerning the deletion of audit documentation?
a. Superseded audit documentation should always be deleted from the audit file.
b. After the audit file has been completed, the auditor should not delete or discard audit documentation.
c. Auditors should use professional skepticism in determining which audit documentation should be
deleted.
d. Audit documentation should never be deleted from the audit file.
12. The permanent file of an auditor’s working papers generally would not include
a. Bond indenture agreement
b. Lease agreements
c. Working trial balance
d. Flowchart of internal control
13. Ignoring any particular legal or regulatory requirement, audit documentation should be retained
a. A minimum of five years.
b. As long as lead schedules have relevance to forthcoming audits.
c. Until 3 years after the client selects another auditor.
d. Working papers must be maintained indefinitely.
14. PSQC 1 requires firms to establish policies and procedures for the timely completion of the assembly of
audit files. Under IPSQC 1, an appropriate time limit within which to complete the assembly of the final
audit file is ordinarily not more than_____ after the date of the auditor’s report
a. 15 days c. 60 days
b. 30 days d. 90 days

AUDIT SAMPLING (PSA 530)

1. The application of statistical sampling techniques is least related to which of the following generally
accepted auditing standards?
a. The work is to be adequately planned, and assistants, if any, are to be properly supervised.
b. In all matters relating to the assignment, independence in mental attitude is to be maintained by the
auditor or auditors.
c. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the
nature, timing and extent of tests to be performed.
d. Sufficient competent evidential matter is to be obtained through inspection observation, inquiries and
confirmations to afford a reasonable basis for an opinion about the financial statements under audit.
2. An auditor plans to test a sample of 20 checks for counter signatures as prescribed by the client’s control
procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider
the reasons for this limitation and
a. Evaluate the results as if the sample size had been 19.
b. Treat the missing check as a deviation for the purpose of evaluating the sample.
c. Treat the missing check in the same manner as the majority of the other 19 checks, i.e., countersigned
or not.
d. Choose another check to replace the missing check in the sample. (AICPA ADAPTED)
3. Which of the following sampling method is most useful to auditors when performing tests of controls?
a. Discovery sampling
b. Attribute estimation
c. Variable sampling
d. Unrestricted random sampling with re placement
4. An underlying feature of random sampling is that each
a. Stratum of the accounting population to be given equal representation in the sample.
b. Item in the accounting population be randomly ordered.
c. Item in the accounting population should have an opportunity to be selected.
d. Item must be systematically selected using replacement.
5. At times, a sample may indicate that the auditor’s assessed level of control risk for a given control is
reasonable when, in fact, the true compliance rate does not justify the assessed level. This situation
illustrates the risk of
a. Assessing control risk too low
b. Assessing control risk too high
c. Incorrect precision
d. Incorrect rejection
6. Which of the following is an element of sampling risk?

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 a. Choosing an audit procedure that is inconsistent with the audit objective.
b. Choosing a sample size that is too small to achieve the sampling objective.
c. Failing to detect an error on a document that has been inspected by the auditor.
d. Failing to perform audit procedures that are required by the sampling plan.
7. An auditor examining inventory may appropriately apply sampling for attributes in order to estimate the
a. Average price of inventory item
b. Percentage of slow-moving inventory items.
c. Dollar value of inventory
d. Physical quantity of inventory items
8. The tolerable rate of deviation for test of controls is generally
a. Lower than expected rate of errors in the related accounting population.
b. Higher than 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.
9. If the auditor is concerned that a population may contain exceptions, the determination of sample size
sufficient to include at least one of such exception is a characteristic of
a. Discovery sampling
b. Variable sampling
c. Random sampling
d. Probability sampling
10. Which of the following best illustrates the concept of sampling risk?
a. A random 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 document related to the chosen sample may not be available for inspection. (AICPA ADAPTED)
11. In attributes estimation, a 10 percent change in which of the following factors normally will have the
least effect on the size of the statistical sample?
a. Population size
b. Precision interval
c. Reliability
d. Standard deviation
12. If the size of the sample to be used in a particular test of attributes has not been determined by utilizing
statistical concepts but the same has been chosen in accordance with random selection procedures,
a. No inferences can be drawn from the sample.
b. The auditor has committed a non sampling error.
c. The auditor may or may not achieve the desired allowance for sampling risk at the desired level of
confidence.
d. The auditor will have to evaluate the results by reference to the principles of discovery sampling.
13. In examining cash disbursements, an auditor plans to choose sample using systematic selection with the
random start. The primary advantage of such systematic selection is that population items
a. That include irregularities will be overlooked when the auditor exercises compatible reciprocal options.
b. May occur in systematic pattern, thus making the sample more representative.
c. May occur more than one in the sample.
d. Do not have to be pre-numbered in order for the auditor to use the technique.
14. In attribute estimation, which of the following must be known in order to appraise the results of the
auditor’s sample?
a. Estimated dollar value of the population.
b. Standard deviation of the values in the population.
c. Actual occurrence rate of the attribute in the population.
d. Sample size.
15. If all other factors specified in a sampling plan remain constant, changing the expected population
deviation rate from 1 to 2 percent would cause the required sample size to
a. Increase
b. Remain the same
c. Decrease
d. Become indeterminate
16. If a selected random number matches the number of avoided voucher, the voucher ordinarily should be
replaced by another voucher in the sample if the voucher
a. Constitutes a deviation
b. Has been properly avoided

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 c. Cannot be located
d. Represents an immaterial dollar amount
17. Discovery sampling should be used to estimate whether a population contains
a. Errors of any kind
b. Noncritical errors
c. Critical deviations
d. No errors
18. Which of the following factors is generally not considered in determining the sample size for a test of
controls?
a. Population size
b. Tolerable rate
c. Risk of assessing control risk too low
d. Expected population deviation rate
19. Assuming the tolerable rate is 5 percent, the expected population rate is 3 percent, and the allowance
for sampling risk is 2 percent, what should an auditor conclude if tests of 100 randomly selected
documents reveals 4 deviations?
a. Accept the sample results as support for assessing control risk below the maximum because the
tolerable rate less the allowance for sampling risk equals the expected population deviation rate.
b. Assess control risk at the maximum because the sample deviation rate plus the allowance for
sampling risk exceeds the tolerable rate.
c. Assess the control risk at the maximum because the tolerable rate plus the allowance for sampling risk
exceeds the expected population deviation rate.
d. Accept the sample results as support for assessing control risk below the maximum because the sample
deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
25. In assessing sampling risk, the risk of assessing control risk too high relate to the
a. Efficiency of the audit
b. Effectiveness of the audit
c. Selection of the sample
d. Audit quality controls
26. If the achieved allowance for sampling risk of a statistical sample at a given reliability level is greater than
the desired range, this is an indication that the
a. Standard deviation was larger than expected.
b. Standard deviation was less than expected
c. Population was larger than expected
d. Population was smaller than expected
27. An auditor initially planned to use unrestricted random sampling with replacement with testing accounts
receivable. Later, the auditor decided to use unrestricted random sampling without replacement. As a
result of this decision, the sample size should
a. Increase
b. Remain the same
c. Decrease
d. Be calculated using the binomial distribution
28. In which of the following cases would the auditor be most likely to conclude that all in the items in an
account under consideration should be examined rather than tested on a sample basis?
The measure of Error frequency is
tolerable error is expected to be
a. Large Low
b. Small High
c. Large High
d. Small Low
29. An advantage of using statistical sampling is that such techniques
a. Mathematically measure risk
b. Eliminate the need for judgmental decision
c. Define the value of reliability necessary to provide audit assurance
d. Have been established in the courts to be superior to non statistical sampling
30. In comparison with probability-proportional-to-size (PPS) sampling, which of the following is an
advantage of classical variables sampling in auditing?
a. If no errors are expected, classical variables sampling usually results in a smaller sample size than PPS
sampling.
b. A classical variable sample can be designed more easily and sample selection can begin before the
complete population is available.

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 c. If there are many individual differences between recorded and audited amounts in the population,
classical variable sampling may result in a smaller sample size.
d. Classical variables sampling automatically results in a stratified sample because items are selected in
proportion to their dollar amounts.
31. In a variables sampling plan, an auditor must generally consider each of the following except
a. Variation within the population
b. Acceptable risk of incorrect acceptance
c. Tolerable error
d. Population size
32. In assessing the risk of incorrect acceptance, an auditor should consider each of the following except
a. Audit risk
b. The risk that internal control structure fails to detect material errors that occur.
c. Tolerable error
d. The risk that analytical procedure and other tests fail to detect material errors that occur and that are
not detected by internal control.
33. An auditor is evaluating the results of a variables sampling plan. Which of the following is not relevant to
the auditor’s judgment about the sample?
a. Management’s explanations for why errors in the sample occurred.
b. Projecting the sample error to the population.
c. Considering the effects of sampling risk.
d. Qualitative information that lends insight into errors found.
34. Several conditions must be met before an auditor applies either difference or ration estimation. Which of
the following is not one of these conditions?
a. Each population item must have a recorded book value.
b. The auditor must not expect understatement errors.
c. Total population book value must be known and must correspond to the sum of all individual
population items.
d. Expected differences between audited and recorded book values must not be too rare.
35. An auditor is applying a difference estimation sampling plan. Assuming the risk of incorrect rejection is .
10, ration of desired allowance for sampling risk to tolerable error?
a.. 500 c. .561
b. .605 d. Not determinable from the facts given.
36. An auditor is applying a difference estimation sampling plan. Assuming a .10 acceptable risk of incorrect
rejection, .05 acceptable risk of incorrect acceptance, and $100,000 tolerable error, what is the auditor’s
desired allowance for sampling risk?
a. $25,0000 c. $100,000
` b. $100,000 d. Not determinable from the facts given.
37. An auditor is applying a difference estimation sampling plan. Recorded book value is $1,000,000, and the
auditor estimates a $75,000 understatement difference. In this case, the auditor’s estimated population
value is
a. $925,000 c. $1,000,000
b. $1,075,000 d. Not determinable from the facts given.
38. An auditor is applying mean-per-unit estimation. Assuming estimated audited value is $950,000, the
achieved allowance for sampling risk is $75,000, and recorded book value is $925,000, what is the
auditor’s conclusion?
a. Recorded book value is not likely misstated by a material amount.
b. Recorded is misstated by material amount.
c. Recorded book value is not likely misstated by a material amount, assuming the client records an
adjusting journal entry equal to allowance for sampling risk.
d. There is insufficient evidence to reach a conclusion.
39. In comparison with classical variable sampling, which of the following is an advantage of probability-
proportional-to-size (PPS) sampling?
a. PPS sampling automatically results in a stratified sample.
b. PPS sampling results in a smaller sample size if many differences are expected between audited and
recorded amounts.
c. PPS sampling is particularly appropriate when understatement errors are expected.
d. PPS sampling is less likely to overstate the allowance for sampling risk when errors are found in the
sample.
40. An auditor is applying probability-proportional-to-size (PPS) sampling. If the population consists of 200
items and is represented by $1,000,000 what is the probability the auditor will select for testing an
account recorded at $100,000?

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 a. .005 c. .025
b. .100 d. Not determinable from the facts given.
41. An auditor is applying probability-proportional-to-size (PPS) sampling. In determining sample size, which
of the following is not necessary?
a. A reliability factor for overstatement errors.
b. A reliability factor for understatement errors.
c. Tolerable error
d. Anticipated error
42. Probability-proportional-to-size (PPS) sampling is most appropriate when
a. The auditor anticipates understatement errors.
b. The auditor anticipates overstatement errors.
c. The auditor expects no errors.
d. The auditor has assessed control risk at the maximum.
43. An auditor is applying probability-proportional-to-size (PPS) sampling. Assuming the risk of incorrect
acceptance is .10, what is the reliability factor for overstatement differences?
a. 2.31 c. 3.89
b. 3.00 d. Not determinable from the facts given.
44. An auditor is evaluating the results of a probability-proportional-to-size (PPS) sampling plan. Assuming
the incremental allowance is $10,500 and the allowance for sampling risk is $45,000, what is basic
precision for the sampling plan?
a. $34,500 c. $55,500
b. $45,000 d. Not determinable from the facts given.
45. Which of the following sampling methods could be designed to estimate the dollar value of an audit
population?
a. Sampling for variables
b. Sampling for attributes
c. Discovery sampling
d. Probability-proportional-to-size (PPS) sampling p
46. Which of the statement is correct about statistical sampling?
a. An auditor needs to estimate the population standard deviation to use classical variables sampling.
b. An assumption of probability-proportional-to-size (PPS) sampling is that the underlying accounting
population be distributed normally.
c. A classical variables sample needs to include negative balances in the sample.
d. The selection of zero balances usually does not require special sample design consideration when using
probability-proportional-to-size (PPS) sampling.
47. If all other factors specified in a variables sampling plan remain constant, increasing the acceptable risk
of incorrect acceptance would cause the required sample size to
a. Decrease c. Increase
b. Remain the same d. become indeterminate
48. An accounts receivable aging schedule was prepared on 300 pages with each page containing the aging
data for 50 accounts. The pages were numbered from 1 to 300 pages and the accounts listed on each
were numbered from 1 to 50. An auditor selected accounts receivable for confirmation using a table of
numbers as illustrated:
Selected Column from Separate 5 Digits: First
Table of Numbers 3 Digits, Last 2 Digits
02011 020-11 x
85393 853-93 *
97265 972-65 *
61680 616-80 *
16656 166-56 *
42751 427-51 *
69994 699-94 *
07942 079-42 y
10231 102-31 z
53988 539-88 *
x Mailed confirmation to account 11 listed on page 20
y Mailed confirmation to account 42 listed on page 79
z Mailed confirmation to account 31 listed on page 102
*Rejected

This is an example of which of the following sampling methods?

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 a. Block sampling c. Haphazard sampling
b. Systematic sampling d. Random-number sampling
49. In which sampling method is the probability of selecting an item proportional to the size of the value of
the item (i.e., a $1,000 item is 10 times more likely to be selected than a $100 item)?
a. Difference estimation
b. Mean-per-unit estimation
c. Probability-proportional-to-size sampling
d. Non-statistical sampling for variables
50. Assume you are auditing a retail department store and want to estimate the dollar amount of errors on
sales invoices using probability-proportional-to-size sampling. Which of the following is true?
a. The risk of incorrect acceptance and incorrect rejection are greater than for a classical variables
sampling plan.
b. Tolerable error is ignored.
c. An invoice with large balance has a greater chance to be selected than one with a smaller balance.
d. The estimate will be unreliable if the error rate is small.

COMPLETING THE AUDIT/POST-AUDIT RESPONSIBILITIES (PSAs 560, 570 and 580 Redrafted)
1. Which of the following matters would an auditor most likely include in a management representation
letter?
a. Communications with audit committee concerning weaknesses and internal control.
b. The completeness and availability of minutes of stockholders’ and directors’ meetings.
c. Plans to acquire or merge with other entities in the subsequent years.
d. Management’s acknowledgments of its responsibility for the detection of employee fraud.
2. The management’s assessment of the entity’s ability to continue as a going concern covers a period of:
a. Not longer than 12 months balance sheet date.
b. At least 12 months from the balance sheet date.
c. Not longer than 12 months from the date of audit report.
d. At least 12 months from the date of audit report.
3. The current chief executive and financial officers have only been employed by ABC Company for the past
five months of year 2. ABC Company is presenting comparative financial statements on Year 1 and 2, both
of which were audited by William Jones, CPA. For which year(s) should Jones obtain written
representations from these two individuals?
Year 1 Year 2
a. No No
b. No Yes
c. Yes No
d. Yes Yes
4. Which of the following statements ordinarily is included among the written client representations
obtained by the auditor?
a. 1st paragraph c. 2nd and 3rd paragraphs
b. 2nd paragraph d. 1st 2nd paragraphs
5. The audit report date is important to users because it indicates the
a. Last day of the fiscal period
b. Last day of the auditor’s responsibility for the review of significant events that occurred after the
date of the financial statements.
c. Date on which the financial statements were filed with SEC.
d. Last day on which users may institute a lawsuit either client or auditor.
6. Which of the following is likely a scope limitation?
a. The auditor is reporting on the balance sheet only
b. A subsidiary’s financial statements are audited by another auditor
c. Sufficient evidence in not available
d. The auditor is engaged after the balance sheet date
7. Because an expression of opinion as to certain identified items in financial statements tends to
overshadow or contradict a disclaimer of opinion or adverse opinion, it is inappropriate for an auditor to
issue a (an)
a. Piecemeal opinion c. “Except for” opinion
b. Unqualified opinion d. “Subject” to opinion
8. When auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the
nature of the omission in a separate explanatory paragraph and modify the introductory and opinion
paragraph.

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 When auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the
nature of the omission in a separate explanatory paragraph and modify the auditor’s responsibility
paragraph and opinion paragraph.

When auditor qualifies an opinion qualifies an opinion because of inadequate disclosure, the auditor
should describe the nature of the omission in a separate explanatory paragraph and modify the
introductory paragraph.
a. First statement is correct, the second and third statements are not correct .
b. First and third statements are not correct; the second statement is correct.
c. All above statements are not correct.
d. First and second statement are not correct; the third statement is correct.
9. Which of the following phrases should be included in the opinion paragraph when an auditor expresses a
qualified opinion?
When read in With the fore going
conjunction with Note X explanation
a. Yes No
b. No Yes
c. Yes Yes
d. No No
10. An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going
concern for a reasonable period of time. If the entity’s financial difficulties, the auditor’s report is required
to include an explanatory paragraph that specifically uses the phase(s)
“Reasonable period of time,
not to exceed 1 year” “Going Concern”
a. Yes Yes
b. Yes No
c. No Yes
d. No No
11. The following statements relate to modifications of the standard audit report:
I. When an auditor is unable to reach a conclusion as to the propriety of management’s representations
he should consider issuing either a qualifying opinion or a disclaimer of opinion.
II. When restrictions that significantly limit the scope of the audit are imposed by the client, the auditor
generally should issue an adverse opinion.
III. Qualifying language may be added to the opinion paragraph of the auditor’s report, but it is never
added to the auditor’s responsibility paragraph.
IV. A change in accounting policy from one generally accepted accounting principle to one another would
not prevent the issuance of an unqualified audit report provided the auditor approved the change in
advance and the effects of the change were set forth in a note to the financial statements.

State whether the foregoing statements are true or false.

a. All of the statements are true.
b. Only one of the statements is true.
c. Only two of the statements are true.
d. Three of the statements are true.
12. According to PSA 705, a modified opinion on the financial statements is necessary when
I. The auditor concludes, based on the audit evidence obtained, that the financial statements as a whole
are not free from material misstatements.
II. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement
a. I only c. Either I or II
b. II only d. Neither I nor II
13. An auditor may reasonably issue a disclaimer of opinion for
Inadequate disclosure Scope limitation
a. Yes Yes
b. Yes No
c. No Yes
d. No No
14. If the auditor obtained satisfaction with respect to the accounts receivable by alternative procedures
because it is impracticable to confirm accounts receivable, the auditor’s report should be unqualified and
could be expected to
a. Disclose that alternative procedures were used due to a client-imposed scope limitation.

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 b. Disclose that confirmation of accounts receivable was impracticable in the opinion paragraph.
c. Not mention the alternative procedures.
d. Refer to a note that discloses the alternative procedures.
15. When a qualified opinion results from a limitation on the scope of the audit, the situation should be
described in an explanatory (additional) paragraph
a. Preceding the opinion paragraph and referred to only in the auditor’s responsibility paragraph of the
auditor’s report.
b. Following the opinion paragraph and referred to in both the auditor’s responsibility and opinion
paragraphs of the opinion’s report.
c. Following the opinion paragraph and referred to only in the auditor’s responsibility paragraph of the
auditor’s report.
d. Preceding the opinion paragraph and referred to in both the auditor’s responsibility and opinion
paragraphs of the auditor’s report.
16. 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. Subject to the departure from generally accepted accounting principles, as described above.
b. With the foregoing explanation of these omitted disclosures.
c. Except for the omission of the information discussed in the basis for qualified opinion paragraph.
d. Does not present fairly in all material respects.
17. An auditor would issue an adverse opinion if
a. The audit was begun by other independent auditors who withdrew from the engagement.
b. A qualified opinion cannot be given because the auditor lacks independence.
c. The restriction of the scope of audit was significant.
d. The statements taken as a whole do not fairly present the financial position, results of operations,
and cash flows of the company.
18. When determining whether an exception is highly material, the extent to which the exception affects
different parts of the financial statements must be considered. This is referred to as
a. materiality c. financial analysis
b. pervasiveness d. risk analysis

COMPARATIVES (PSA 710)

1. When reporting on comparative financial statements, an auditor ordinarily should change the previously
issued opinion on the prior year’s financial statements if the
a. Prior year’s financial statements are restated to conform with generally accepted accounting
principles.
b. Auditor is a predecessor auditor who has been requested by a former client to reissue the previously
issued report.
c. Prior year’s opinion was unqualified and the opinion on the current year’s financial statements is
modified due to a lack of consistency.
d. Prior year’s financial statements are restated following a pooling of interests in the current year.
2. Jewel, CPA, audited Infinite Co.‘s prior year financial statements. These statements are presented with
those of the current year for comparative purposes without Jewel’s auditor’s report, which expressed a
qualified opinion. In drafting the current year’s auditor’s report, Grain, CPA, the successor auditor, should

I. Not name Jewel as the predecessor auditor.

II. Indicate the type of report issued by Jewel.
III. Indicate the substantive reasons for Jewel’s qualification.
a. I only c. II and III only
b. I and II only d. I, II and III
3. Before reissuing the prior year’s auditor’s re[ort on the financial statements of a former client, the
predecessor auditor should obtain a letter of representations from the
Former client’s management Successor auditor
a. Yes Yes
b. Yes No
c. No Yes
d. No No
4. When single-year financial statements are presented, an auditor ordinarily would express an unqualified
opinion in an unmodified report if the
a. Auditor is unable to obtain audited financial statements supporting the entity’s investment in a foreign
affiliate.

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 b. Entity declines to present a statement of cash flows with its balance sheets and related statements of
income and retained earnings.
c. Auditor wishes to emphasize an accounting matter affecting the comparability of the financial
statements with those of the prior year.
d. Prior year’s financial statements were audited by another CPA whose report, which expressed an
unqualified opinion, is not presented.
5. A client is presenting comparative (two-year) financial statements. Which of the following is correct
concerning reporting responsibilities of a continuing auditor/
a. The auditor should issue one audit report that is on both presented years.
b. The auditor should issue two audit reports, one on each year.
c. The auditor should issue one audit report, but only on the most recent year.
d. The auditor may issue either one audit report on both presented years, or two audit reports, one on
each year.
6. The predecessor auditor, who is satisfied after communicating with the successor auditor, has reissued a
report because the audit client desires comparative financial statements. The predecessor auditor’s
report should make
a. Reference to the report of the successor auditor only in the scope paragraph.
b. Reference to the work of the successor auditor in the scope and opinion paragraphs.
c. Reference to both the work and the report of the successor auditor only in the opinion paragraph.
d. No reference to the report or the work of the successor auditor.
7. Unaudited financial statements for the prior year presented in comparative form with audited financial
statements for the current year should be clearly marked to indicate their status and
I. The report on the prior year period should be reissued to accompany the current year period report.
II. The report on the current period should include as separate paragraph a description of the
responsibility assumed for the prior period’s financial statements.
a. I only c. Both I and II
b. II only d. Either I or II
8. They are not presented as complete financial statements capable of standing alone, but are an integral
part of the current period financial statements intended to be read only in relationship to the current
period figures.
a. Corresponding figures
b. Comparative financial statements
c. Prior period figures
d. Comparatives

OTHER INFORMATION (PSA 720)

1. It exists when other information, not related to matters appearing in the audited financial statements, is
incorrectly stated or presented.
a. Material inconsistency
b. Material misstatement of fact
c. Material weaknesses
d. Misstatement
2. When auditing financial statements are presented in a client’s document containing other information,
the auditor should
a. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
b. Add an explanatory paragraph to the auditor’s report without changing the opinion on the financial
statements.
c. Perform the appropriate substantive auditing procedures to collaborate the other information.
d. Read the other information to determine that it is consistent with the audited financial statements.
3. If an amendment to other information in a document containing audited financial statements is necessary
and the entity refuses to make the amendment, the auditor should consider issuing:
a. Qualified or adverse opinion
b. Unqualified opinion with explanatory paragraph.
c. Qualified of disclaimer of opinion
d. Unqualified

PRE-WEEK LECTURE PART 3

1. General purpose financial statements are financial statements prepared in accordance with a financial
reporting framework that is designed to:
a. meet the particular information needs of a wide range of users

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 b. meet the particular information needs of a group of users
c. meet the common information needs of wide range of users.
d. meet the common information needs of a group of users
2. In forming an opinion on the financial statements.
a. the auditor should evaluate the conclusions drawn from the audit evidence obtained during the
course of the audit
b. the auditor evaluates whether there is a reasonable assurance about whether the financial statements
are free from any misstatements
c. the auditor evaluates whether sufficiently appropriate audit evidence has been obtained to eliminate
the risk of material misstatements
d. the auditor verifies that all errors that misstate the financial statements have been corrected by the
client
3. In evaluating whether the financial statements have been prepared and presented in accordance with the
specific requirements of the applicable financial reporting framework for particular classes of
transactions, account balances and disclosures, the auditor should consider:
a. that the accounting estimates made by the management are reasonable in the circumstances
b. that the information presented in the financial statements, including accounting policies, is relevant,
reliable, comparable and understandable
c. that the accounting policies selected and applied are consistent with the financial reporting framework
d. All of the choices given are to be considered
4. Which of the following is least likely considered by the auditor when he has to evaluate the fair
presentation of the financial statements?
a. Whether the financial statements, after any adjustments made by management as a result of audit
process, are consistent with the auditor’s understanding of the entity and its environment.
b. Whether the financial statements, including the disclosures, faithfully represent the underlying
transactions and events in a manner that gives a true and fair view of, in all material respects, the
information conveyed in the financial statements in the context of the financial reporting framework.
c. Whether the results of analytical procedures performed at or near the end of the audit help to
corroborate conclusion formed during the audit.
d. Whether the financial statements are approved by the client’s board of directors.
5. If the auditor encounters circumstances that lead him to conclude that compliance with a specific
requirement results to financial statements that are misleading, the auditor:
a. considers the need to appropriately modify the auditor’s report
b. does not need to modify the report
c. needs to issue qualified opinion
d. needs to disclaim his opinion
6. What is the overriding benefit of having consistency in the report?
a. Consistency promotes credibility in the global marketplaces by making more readily identifiable
those audits that have been conducted in accordance with globally recognized standards.
b. Consistency in the form promotes the expression of unqualified opinion.
c. Consistency lessens the auditor’s legal and civil liabilities.
d. The audit report eliminates some disclosures required in the financial statements.
7. When an entity presents, together with the financial statements, supplementary information that cannot
be clearly differentiated from the financial statements because of its nature and how it is presented, such
supplementary information
a. must be specifically referred to in the introductory paragraph of the auditor’s report
b. is covered by the auditor’s opinion
c. is referred by adding an emphasis of matter paragraph
d. is not covered by the auditor’s opinion
8. Which of the following is an incorrect statement about supplementary information?
a. The auditor’s opinion may or may not cover the supplementary information
b. It is important for the auditor to be satisfied that any supplementary information that is not covered by
the financial statements
c. The supplementary information that cannot be differentiated from the financial statements is covered
by the auditor’s opinion.
d. Supplementary information that is presented as an integral part of the financial statements always
needs to be specifically referred to in the introductory paragraph of the auditor’s report
9. Which of the following is incorrect regarding the auditor’s signature?
a. The auditor’s signature is either in the name of the audit firm, the personal name of the auditor, or
both, as appropriate.

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 b. The auditor’s signature is either in the name of the audit firm or the personal name of the auditor,
but not both.
c. In addition to the auditor’s signature, the auditor may be required to declare the auditor’s professional
accountancy designation.
d. The auditor’s report filed with the Securities and Exchange Commission (SEC) must be manually signed.
10. Which of the following information is(are) required when an auditor’s report is issued on financial
statements to be filed with the Securities and Exchange Commission?
1. Audit report is manually signed
2. Certifying partner to sign his name.
3. Partner’s Tax Identification Number.
4. PRC registration number
4. Accreditation with SEC
a. 1,2,3,4,5 c. 1,3,4,5
b. 2,4,5 d. 2,3,4,5
11. Why is the date of the auditor’s report important?
a. To have a basis of determining the audit fees to be paid to the auditor.
b. The date of the auditor’s report informs the readers that the auditor has considered the effect of
events and transactions of which the auditor became aware and that occurred up to that date.
c. To emphasize completeness assertion.
d. To inform the users of the financial statements that the auditor complied with the applicable Philippine
Standards on Auditing.
12. How is the auditor’s report on the financial statements that require final approval by stockholders before
such financial statements are issued publicly dated?
a. The auditor’s report should be dated coinciding the date of approval of the financial statements by the
stockholders.
b. The auditor’s report should be dated after the approval of the financial statements by the stockholders.
c. The date of the auditor’s report coincides the date of approval of the financial statements by the
board of directors.
d. The audit report should be dual dated, the first date coinciding the approval by the board of directors
and the second date to coincide with the approval by the stockholders.
13. Which of the following is ordinary true of a modification of audit report by adding an emphasis of matter
paragraph?
a. The modification by adding an emphasis of matter paragraph is an “except for” qualification of opinion.
b. The emphasis of matter paragraph of matter paragraph is a “subject to” qualification of opinion.
c. The emphasis of matter paragraph would ordinarily refer to the fact that the auditor’s opinion is not
qualified.
d. The emphasis of matter paragraph is presented before the opinion paragraph.
14. The audit report issued by Lozano and Co., CPAs included the following paragraph that followed the
opinion paragraph:

Without qualifying our opinion we draw attention to Note 11 to the financial statements. The
Company is the dependent in a lawsuit alleging infringement of certain patent rights . . .
This paragraph is considered:
a. an inappropriate reporting practice
b. an additional information to be a part of the notes to financial statements.
c. an emphasis of matter regarding uncertainty which is considered an acceptable reporting practice.
d. inappropriate because it contradicted the unqualified opinion issued by the auditor.
15. In extreme cases such as situations involving multiple uncertainties that are significant to the financial
statements, the auditor
a. may consider to express a disclaimer of opinion
b. may qualify this opinion instead of issuing an unqualified opinion with emphasis of matter paragraph
c. may issue an adverse opinion because of their significance
d. may issue a “subject to” opinion because the situations related to uncertainties
16. Which of the following situation the effect of which is significant least likely require a decision of
whether to issue a qualified or adverse opinion?
a. Disagreement with entity management regarding the acceptability with entity management regarding
the acceptability of the accounting policies selected by the management.
b. Limitation on the scope of the auditor’s work.
c. Inadequate disclosures of financial information.
d. Unjustified changes in accounting policies.

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17. Which of the following is not a reason to issue a modified audit report with opinion other than
unqualified opinion?
a. The scope of the auditor’s work restricted by the client.
b. The amount of inventories at cost as presented in the balance sheet significantly exceeded their market
values.
c. Certain significant matter is omitted from either the financial statements or notes to financial
statements.
d. An adequately disclosed significant uncertainty, the resolution of which is dependent upon feature
events and which may affect the financial statements.
18. Which of the following circumstances may not result to a disclaimer of opinion?
a. A significant scope limitation in auditing the existence of inventories. The inventory amount comprised
75 percent of the total assets of the client.
b. The auditor believes, there are multiple uncertainties that are significant to the financial statements.
c. The accounts receivable of the client comprised 80 percent of the total assets. The auditor was
instructed by the client not to confirm account balances. The auditor, however, was satisfied by the
results of alternative audit procedures.
d. The auditor’s wife owns very few numbers of common shares of the client.
19. Which of the following situations may likely require a modified audit report with modified wordings or
an emphasis of matter paragraph?
a. A significant uncertainty, not adequately disclosed in the financial statements.
b. An audit of inventory is restricted by the client. The auditor was satisfied about the balance of the
inventory by doing alternative audit procedures.
c. A change in the application of generally accepted accounting principle that is justified.
d. A less than substantial doubt regarding the ability of the entity to continue as a going concern.
20. In which of the following situation would a decision of selecting between a qualified or adverse opinion
be inappropriate?
a. A limitation in the scope of the audit.
b. The financial statements are significantly misleading.
c. A disagreement between the auditor and the client arose because of capitalization of research and
development costs.
d. A required disclosure that is significant is omitted from the financial statements.
21. The expression of a qualified opinion means that the financial statements, taken as a whole, in all
material respects, are
a. materially misstated c. present fairly
b. materially misleading d. do not present fairly
22. The auditor may continue to expose unqualified opinion through there are modifications made in the
audit report. Which of the following situations, would the auditor likely modify his opinion?
a. Existence of multiple uncertainties that are adequately described in the notes to financial
statements.
b. The prior year’s financial statements were audited by other CPAs.
c. An important subsidiary whose financial statements were included in the consolidated financial
statements was audited by other CPAs.
d. A substantial doubt about the client’s ability to continue as a going concern which is adequately
disclosed in the financial statements.
23. In which of the following situations would qualified opinion be inappropriate?
a. Financial statements are materially misstated.
b. A doubt that is more than substantial about the ability of the company to continue as a going
concern.
c. A significant scope limitation.
d. The management insisted of not attaching the statement of cash flows.
24. Which of the following circumstances least likely result to either a qualified opinion or an auditor
disclaiming his opinion?
a. The auditor is unable to carry out an audit procedure believed to be desirable; the auditor carried
out alternative audit procedures to support the management’s assertion.
b. The auditor believed the client’s accounting records are inadequate.
c. A client imposed scope limitation with respect to the audit of inventory.
d. Circumstances did not permit the auditor to perform certain required audit procedure.
25. When there is a limitation on the scope of the auditor’s work that requires a modification of the audit
report:
a. The auditor’s report should either contain a qualified or adverse opinion.

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 b. The auditor’s report may contain an unqualified opinion with an emphasis of matter paragraph that
follows the opinion paragraph.
c. The auditor’s report should describe the limitation and indicate the possible adjustments to the
financial statements that might have been determined to be necessary had the limitation not existed.
d. Should always contain a disclaimer of opinion.
26. Which of the following least likely requires an expression of unqualified opinion with modified wordings
or an emphasis of matter paragraph?
a. The financial statements of prior period, which are presented for comparative purposes, were audited
by another CPA’s.
b. The auditors have substantial doubt about the ability of the entity to continue as a going concern.
c. The entity changed the measurement of certain significant transaction from one GAAP to another
GAAP.
d. The auditors failed to observe physical inventory count; however, the auditor was satisfied that the
inventory amount was fairly presented by doing alternative audit procedures.
27. In which of the following situations would an auditor ordinarily choose between expressing a qualified
opinion or an adverse opinion?
a. The auditor did not observe the entity’s physical inventory and is unable to become satisfied about its
balance by other auditing procedures.
b. Conditions that cause the auditor to have substantial doubt about the entity’s ability to continue as a
going concern are not disclosed.
c. There has been a change in accounting principles; the material effect on the comparability of the
entity’s financial statements has been properly disclosed in the financial statements.
d. The auditor is unable to apply necessary procedures concerning an inventor’s share of an investee’s
earnings recognized on the equity method.
28. A client company has issues that cause substantial doubt regarding the entity’s ability to continue as a
going concern. If this is the only major audit issue, which type of opinion will the auditor usually refrain
from issuing?
a. Adverse c. Clean opinion
b. Unqualified with explanatory language d. Disclaimer of opinion
29. An explanatory paragraph may be added to the audit report while at the same time issuing an
unqualified opinion in all cases except when:
a. the client has changed an accounting principle with the agreement of the auditor.
b. there is an immaterial departure from GAAP to ensure fair presentation with the agreement of the
auditor.
c. the audit opinion is partly based on the work of another auditor.
d. he audit work has been materially limited by management
30. Which of the following circumstances requires an issuance of unqualified opinion with modified
wordings?
a. A significant uncertainty that may affect the financial statements of the future period is adequately
disclosed in the financial statements.
b. The auditor agreed with the client for a change in accounting policy that significantly affects the
financial statements.
c. An insignificant scope limitation in the work of the auditor.
d. The predecessor auditor reports on the current year’s financial statements. The prior-year’s financial
statements that were presented as comparatives were audited by another CPA.
31. Which of the following best describes the attest process?
a. Proving the accuracy of the books and records.
b. Gathering evidence about specific and known assertions.
c. Assisting management in the successful operations of the company.
d. Assembling and filing tax returns and related supplemental information.
32. Which one of the following is an example of management expectations for independent auditors?
a. An expert providing a written communication as the product of the engagement.
b. Individuals who perform day-today accounting functions on behalf of the company.
c. An active participant in management decision.
d. An internal source of expertise on financial and other matters.
33. Which of the following represents a situation in which an auditor is reasonably independents of the
client?
a. The auditor is paid by the client organization rather than the users of the financial statements.
b. The auditor takes a personal loan from the president of the company.
c. The auditor’s dependent son holds 25 shares of the client’s common stock.
d. The auditor has not received payment for the previous audit services.

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34. A CPA firm is considered independent when it performs which of the following services for a publicly
traded audit client?
a. Serving as a member of the client’s board of directors.
b. Determining which accounting policies will be adopted by the client.
c. Accounting information system design and implementation.
d. Tax return preparation as approved by the board of directors.
35. Which of the following represents a procedure the auditor may use because plausible relationships
among financial statement balances are expected to exist?
a. Attributes testing c. Inherent tests of control
b. Enterprise risk assessment d. Analytical review
36. An auditor compares expenses as a percent of sales to expectations. This is an example of;
a. ratio analysis c. internal analysis
b. trend analysis d. vertical analysis
37. What is the primary purpose of effective internal control in an organization?
a. Achievement of certain organizational goals.
b. Completion of a successful audit for the entity.
c. Shareholders involvement in the company’s success.
d. Obtaining profitability and financial strength.
38. Which of the following is not a major emphasis in the design of affective internal control?
a. Assets are properly protected
b. Duties are segregated
c. Transactions are authorized
d. Processes are efficient
39. Which one of the following is the most relevant factor in assessing the control risk of a computerized
environment?
a. Computerized environments provide management with effective replacement controls.
b. Computerized accounting systems enhance efficiency for users.
c. An auditor’s method of testing the effectiveness of the system controls is the same in a computerized
system as in a manual system.
d. The control risk over computerized accounting systems must be assessed during planning.
40. Management’s assertions in the financial statements are of relevant to the audit process because:
a. they embody the procedures that will be performed by the audit team
b. they include representations of financial statements in accordance with the applicable reporting
criteria
c. they provide evidence that auditors have prepared financial statements in accordance with GAAP
d. they relate to regulator’s expectations about audit results
41. To establish the validity of account balances and transactions relating to recorded amounts, auditors
may resort to:
a. vouching c. representing
b. tracing d. footing
42. The assertion of existence can be audited directionally by considering balances and transactions from:
a. recorded amounts to evidence regarding the source
b. evidence regarding the source to recorded amounts
c. general ledgers to trial balances
d. all of these choices
43. The primary deliverable of an engagement to perform based on procedures prescribed by the intended
user of the report is(are)
a. the financial statements
b. the Review Report
c. Report of Factual Findings
d. Management Letter
44. Which of the following best represents an auditor’s responsibility for fraud?
a. Auditors are only required to find securities fraud
b. Auditors defer to management to discover the extent of fraud
c. Auditors are required to discover misstatements resulting from material fraud
d. Auditors are required to seek out and find all fraud, regardless of its magnitude
45. An auditor will most likely estimate the tolerable failure rate in order to:
a. determine which type of sampling approach to use
b. calculate the probable control risk
c. determine the population to be tested
d. determine the appropriate sample size

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46. For a company with strong internal control over receivables, the distinguishing feature of the audit use
of positive confirmations in contrast to negative confirmations is;
a. the population sampled
b. the involvement of the client in the confirmation process
c. the type of information included
d. the volume of confirmations returned
47. Auditors test management’s estimates of an asset’s impaired value through reference to all of the
following except;
a. inquiry of fixed asset personnel
b. evidence of fair market value
c. estimated cash flow
d. financial plans
48. The auditor may determine that fixed assets that should have been capitalized as assets have been
recognized as expenses during the period under audit by testing:
a. assets for impairment
b. repairs and maintenance expenses
c. depreciation expense
d. useful lives of assets
49. The product of inherent risk and control risk is assessed as low. How would an auditor with this
assessment most likely test depreciation expense?
a. As a ratio of total assets
b. As a percent of sales
c. By recomputing all depreciation figures
d. By tagging and tracing transactions through the system
50. A company issues preferred stock. Which of the following will the auditor evaluate for disclosure
purposes in the financial statements relating to the outstanding shares of preferred stock?
a. Liquidation preference
b. Fair market value
c. Number of shareholders or record
d. Dividends per share ratio
51. Misstatements that are found during an audit and aggregated at the conclusion of the audit for further
consideration by the auditor for their impact on the financial statements typically include:
a. those material items that have been proposed by the auditor for adjustment and accepted by the
client.
b. those of an immaterial magnitude that have been passed by the auditor until the completion of the
audit
c. those of a material nature that have been ignored by the auditor due to the risk of sampling error
d. those of immaterial amounts that were not documented by the auditor because they are of an
inconsequential matter to the audit
52. A management representation letter is prepared on each engagement for which of the following
primary reasons?
a. It clearly documents the audit procedures that were performed by the auditors.
b. It further acknowledges that management is responsible for fraud contained in the financial
statements.
c. It provides the auditor with comfort that the client has integrity and is not misleading the engagement
team.
d. It clarifies certain matters included in the letter and documents them for the auditor as further
evidence from the client.
53. A review engagement differs in scope as compared to an audit due to:
a. the subject matter of the service
b. the quantity and type of evidence obtained
c. ethical requirements with respect to independence
d. the users of the financial statements
54. Roy, CPA, forgot to test a client’s assessment of goodwill impairment during an audit. Such an act is
probably an example of:
a. ordinary negligence c. reckless professional behavior
b. due diligence d. fraud
55. An internal auditor’s report to management will typically include:
a. an opinion paragraph c. A commitment to impairment solutions
b. Issues and findings d. All of these choices
56. Analytical procedures are used

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 a. to set a materiality limits
b. to assess the reasonableness of financial statement amounts
c. to provide direct evidence about the numbers in the financial statements
d. to test internal controls
57. The risk that material misstatements have occurred in transactions entering the accounting system is
a. audit risk c. control risk
b. inherent risk d. detection risk
58. In the audit risk model, if an auditor wanted to keep audit risk at a low level, but there was a great
inherent risk of material misstatement and the internal control was ineffective, then procedures would
need to be designed so that
a. detection risk was at a low level
b. detection risk was at a high level
c. control risk was at a low level
d. inherent risk was at a high level
59. Physical observation by an auditor would include
a. examination of a sales invoice
b. b. recalculation of depreciation
c. examination of securities certificates
d. scanning the expense accounts for unusual transactions
60. The concept of materiality is not used by auditors as a guide to
a. planning the audit program
b. evaluation of the evidence
c. application of general standards
d. making decisions about the audit report
61. Inherent risk is not a characteristics of the
a. client’s business c. major types of transactions
b. substantive procedures d. effectiveness of the client’s accountants
62. Which of the following risks is entire a quality criterion based on professional judgment
a. Audit risk c. Control risk
b. Inherent risk d. Detection risk
63. Fraudulent companies will prepare financial statements that are materially misleading by doing all of
the following except
a. understate revenues and assets
b. understate expenses and liabilities
c. show financial performance better than industry average
d. have performance exactly meet announced targets
64. A program for understanding the client’s inherent risk and control risk would not include the procedure
to
a. understand economy and industry with which the client operates
b. study previous year audit documentation
c. evaluate the competence and independence of the internal auditors
d. obtain written representation from the client concerning the collectability of receivables
65. A auditor obtains knowledge about a prospective client’s business and industry to:
a. identity areas of specific risk to the engagement
b. determine whether the client’s management is sufficiently trustworthy to justify accepting the
engagement
c. make preliminary judgments about material misstatements in the client’s financial statements
d. document weakness in the client’s internal control
66. When there is a subsequent discovery of omitted procedures, although the financial statements are
fairly presented, the auditor may not have met due diligence requirements. The auditor:
a. is under no obligation to perform additional audit procedures
b. must contact the client and perform the omitted procedures
c. must notify the SEC of the omitted procedures
d. immediately resign from the engagement
67. Contingency fee based pricing of accounting services is:
a. Always strictly prohibited in public accounting practice.
b. Allowed in an engagement to compile financial statements.
c. Not prohibited if associated with report based on agreed-upon procedures.
d. Always considered an act discreditable to the profession.
68. Discussion with the owner manager of an audit client reveal to the auditor that the company is more
concerned with minimizing their income tax payments than maximizing income. Based on this

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 information, which management assertion will the auditor be most concerned about verifying with regard
to sales revenue?
a. Existence and occurrence c. Rights and Obligation
b. Completeness d. Valuation
69. Which of the following statement best represents the reason why auditors prepare engagement letters
to be signed by their clients?
a. They provide documentation of management’s responsibility for the financial statements.
b. They document the audit fees and deadlines that have been agreed upon with their clients.
c. They communicate and clarify the expectations and responsibilities of both the client and the
auditor.
d. They help to limit auditor liability in the event of misunderstandings.
70. Which of the following series of steps represent the correct sequence of evidence as represented in the
audit testing hierarchy?
a. risk assessment, tests of controls, tests of details, substantive analytical procedures
b. risk assessment, tests of controls, substantive analytical procedures, tests of details
c. tests of controls, risk assessment, test of details, substantive analytical procedures
d. tests of controls, risk assessment, substantive analytical procedures, tests of details
71. Bolante, a senior auditor, is the team leader of the audit team assigned in the audit of HCB Company.
His first assignment as junior was the audit of inventory of HCB Company. Since then, he has been a
member, and for the last 5 years, the in-charge of the team for the audit of HCB.
What kind of threat to independence, if any, has been created by the foregoing fact?
a. Advocacy threat c. Self-review threat
b. Self-interest threat d. Familiarity threat
72. When the professional accountant has obtained sufficient appropriate evidence to be satisfied that the
subject matter is plausible in the circumstances, he or she can provide what level of assurance?
a. Positive c. Moderate
b. High d. Absolute
73. Which of the following is more difficult to evaluate objectively?
a. Efficiently and effectiveness of operations.
b. Compliance with government regulations.
c. Presentation of financial statements in accordance with generally accepted accounting principles.
d. All three of the above are equally difficult.
74. Which statement is incorrect regarding the auditors’ consideration of laws and regulations in an audit of
financial statements?
a. When the auditor becomes aware of information concerning a possible instance of noncompliance, the
auditor should evaluate the possible effect on the financial statements.
b. If the auditor concludes that the noncompliance has a material effect on the financial statements, and
has not been properly reflected in the financial statements, the auditor should express a qualified or an
adverse opinion.
c. The auditor may withdraw from the engagement when the entity does not take the remedial action
that the auditor considers necessary in the circumstances; even the noncompliance is not material to the
financial statements.
d. In order to plan the audit, the auditor should obtain a specific understanding of the legal and
regulatory framework applicable to the entity and the industry and how the entity is complying with
that framework.
75. How can the audit program best be described at the beginning of the audit process?
a. Temporary c. Confirmed
b. Conclusive d. Optional
76. If, when performing analytical procedures, an auditor observes that operating income has declined
significantly between the preceding year and the current year, the auditor should next:
a. require that the decline be disclosed in the financial statements
b. consider the possibility that the financial statements may be materially misstated
c. inform management that a qualified opinion on the financial statements will be necessary
d. determine management’s responsibility for the decline and discuss the issue with the audit committee
77. The objective of dual-purpose tests is to
a. evaluate whether internal controls are operating effectively
b. detect material misstatements in the financial statements
c. identify unusual trends or patterns in comparative financial statements
d. test internal controls as well as transactions and balances using the same test procedures
78. Internal controls are designed to provide reasonable assurance that:
a. Control policies have not been circumvented through management’s joint effort.

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 b. The internal auditing department’s guidance and oversight of management’s performance is
accomplished economically and efficiently.
c. Management’s planning, organizing, and directing processes are properly evaluated.
d. Material errors or fraud would be prevented or detected and corrected within a timely period by
employees in the course of performing their assigned duties.
79. When would an auditor typically not perform additional tests f a computer systems controls?
a. When the assessed level of control risk is at a minimum.
b. When computer controls appear to be strong and risk is at a minimum.
c. When controls appear to be weak.
d. When inherent risk is at a maximum.
80. The auditor should consider whether the assessment of control risk is confirmed
a. Upon completion of understanding of internal control
b. Upon the conclusion of the audit, based on the results of substantive procedures and other audit
evidence obtained.
c. Upon completion of tests of controls.
d. Before the final audit program is completed.
81. The audit objective “that all transactions and accounts that should be presented in the financial
statements are included” is related to which assertion?
a. occurrence c. completeness
b. rights and obligations d. presentation and disclosure
82. The audit objective “that all footnotes have been included in the financial statements” is related most
closely to which assertion?
a. existence or occurrence c. completeness
b. rights and obligations d. presentation and disclosure
83. Cut-off tests are used in order to determine
a. whether all of the current period’s transactions are recorded
b. that no transactions from the prior period are included on the current period’s balance
c. that no transactions of the current period have been omitted and subsequently recorded in the next
period
d. whether the transaction are recorded in the appropriate accounting period
84. If subsequent to the issuance of the audited financial statements, the auditor becomes aware of
material misstatements in the financial statements that exist prior to the audit report, the auditor should
a. Notify the parties who currently relying on the financial statements.
b. Discuss the matter with management, and should take the action appropriate in the circumstances.
c. Document such information in the audit plan for succeeding audit.
d. Submit a revised copies of the financial statements and audit report to the stockholders.
85. When a new audit report is issued on financial statements because of subsequent discovery of material
misstatements on previously issued financial statements, the audit report should include
a. No modification
b. Qualified opinion because of scope limitation
c. Qualified opinion because of inadequate disclosure
d. Emphasis of a matter paragraph referring to a note to the financial statements that more extensively
discusses the reason for the revision of the previously issued financial statements.
86. Of the two major categories of scope restrictions. (1) those caused by client and (2) those caused by
conditions beyond the control of either client or auditor, the effect on the auditor’s judgment is
a. the same for either c. More serious for 2 than for 1
b. More serious for 1 than for 2 d. Negligible
87. Which of the following is appropriate when material inconsistency exists in the other information and
the entity refuses to make the amendment?
a. Issue a qualification opinion due to inconsistent data.
b. Issue a qualified opinion because material inconsistency may raise doubt about the audit conclusion
drawn from audit evidence.
c. Include an emphasis of matter paragraph describing the material inconsistency.
d. Attach a separate statement that reconciles the inconsistency.
88. If an auditor is using test data in a client’s computer system to test the integrity of the systems output,
which of the following types of controls is the auditor testing?
a. Genera controls c. Quantitative test controls
b. User controls d. Application controls
89. Which of the following is an incorrect statement regarding testing strategies related to auditing through
the computer?

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 a. The test data approach involves processing the client’s data on a test basis to determine the integrity
of the system.
b. The test data approach involves processing the auditor’s test data on the client’s computer system to
determine whether computer-performed controls are working properly.
c. Test data should include all relevant data conditions that the auditor is interested in testing.
d. When the auditor uses the embedded audit module approach, an audit module is inserted in the
client’s system to capture transactions with certain characteristics.
90. Which of the following is correct concerning requirements about auditor communications about fraud?
a. Fraud that involves senior management should be reported directly to the audit committee
regardless of the amount involved.
b. Fraud with a material effect on the financial statements should be reported directly by the auditor the
SEC.
c. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor
through use of an “emphasis of matter”.
d. The auditor has no responsibility to disclose fraud outside the entity under any circumstance.
91. The most difficult type of misstatement to detect is fraud based on
a. The over recording of transactions
b. The non-recording of transactions
c. Recorded transactions in subsidiaries
d,. Related-party receivables
92. Which of the following is most likely to be an overall response to fraud risks identified in an audit?
a. Supervise members of the audit team less closely and rely more upon judgment.
b. Use less predictable audit procedures.
c. Only use certified public accountants on the engagement.
d. Place increased emphasis on the audit of objective transactions rather than subjective transactions.
93. While assessing the risks of material misstatements, the auditors identify risks, related risk to what
could go wrong, consider the magnitude of risks and
a. Assess the risk of misstatements due to illegal acts.
b. Consider the complexity of the transactions involved.
c. Consider the likelihood that the risks could result in material misstatements.
d. Determine materiality levels.
94. After fieldwork audit procedures are completed, a partner of the CPA firm who has not been involved in
the audit performs a second or wrap-up working paper review. This second review usually focuses on
a. The fair presentation of the financial statements in conformity with PFRS.
b. Fraud involving the client’s management and its employees.
c. The materiality of the adjusting entries proposed by the audit staff.
d. The communication of internal control weaknesses to the client’s audit committee.
95. An accountant may accept an engagement to apply agree-upon procedures to prospective financial
statements provided that
a. Use of the report is restricted to the specified parties.
b. The prospective financial statements are also examined.
c. Responsibility for the adequacy of the procedures performed is taken by the accountant.
d. Negative assurance is expressed on the prospective financial statements taken as a whole.
96. Which of the following controls most likely would assure that all billed sales are correctly posted to the
accounts receivables ledger?
a. Daily sales summaries are compared to daily postings to the accounts receivables ledger.
b. Each sales invoice is supported by a pre-numbered shipping document.
c. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
d. Each shipment on credit is supported by a pre-numbered sales invoice.
97. Proper authorization of write-offs of uncollectible accounts should be approved in which of the
following departments?
a. Accounts receivable c. Accounts payable
b. Credit d. Treasurer
98. In testing controls over cash disbursements, an auditor most likely would determine that the person
who signs checks also
a. Review the monthly bank reconciliation
b. Returns the checks to accounts payable
c. Is denied access to the supporting documents.
d. Is responsible for mailing the checks.
99. 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 would indicate that

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 a. Irregularities exist among the relevant account balances.
b. Internal control activities are not operating effectively.
c. Additional tests of details are required
d. The communication with the audit committee should be revised.
100. To be effective, analytical procedures in the overall review stage of an audit engagement should be
performed by
a. The staff accountant who performed the substantive auditing procedures.
b. The managing partner who has responsibility for all audit engagements at that practice office.
c. A manager or partner who has a comprehensive knowledge of the client’s business and industry.
d. The CPA firm’s quality control manager or partner who has responsibility for the firm’s peer review
program.

OTHER SUBSTANTIVE TESTS

Audit of Litigations, Claims and Assessments
1. When litigation of claims have been identified or when the auditor believes they may exist, the auditor
should
a. Seek direct communication with the entity’s lawyers.
b. Disclose the litigation and claims in the auditor’s report.
c. Issue unqualified opinion with explanatory paragraph.
d. Issue qualified or adverse opinion.
2. The auditor should carry out procedures in order to become aware of any litigation and claims involving
the entity which may have a material effect on the financial statements. Such procedures least likely
include
a. Making appropriate inquiries of management including obtaining representations.
b. Reviewing board minutes and correspondence with the entity’s lawyers.
c. Examining interest expense accounts.
d. Using any information obtained regarding the entity’s business including information obtained from
discussions with any in-house legal department.
3. The primary source of information to be reported about litigation, claims and assessment is the
a. Client’s lawyer c. Client’s management
b. Court records d. Independent auditor
4. The primary reason an auditor requests that letters of inquiry be sent to a client’s attorneys is to provide
the auditor with
a. The probable outcome of asserted claims and pending or threatened litigation.
b. Corroboration of the information furnished by management about litigation, claims and
assessments.
c. The attorneys’ opinion of the client’s historical experiences in recent similar litigation.
d. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet
date.
5. Which of the following statements concerning litigation, claims, and assessments, which were extracted
from a letter from a client’s lawyer, is most likely to cause the auditor to request clarification?
a.”I believe that the possible liability to the company is nominal in amount.”
b. “I believe that the action can be settled for less than the damages claimed.”
c. “I believe that the plaintiff case against the company is without merit.”
d. “I believe that the company will be able to defend this action successfully.”
6. The appropriate date for the client to specify as the effective date in the audit inquiry to a lawyer is
a. The balance sheet date.
b. Seven working days after the request is received by the lawyer.
c. The date of the audit inquiry itself.
d. The expected date of the completion of audit field work.
7. The refusal of a client’s lawyer to provide a representation on the legality of a particular act committed
by the client is ordinarily
a. Sufficient reason to issue a “subject to” opinion.
b. Considered to be a scope limitation.
c. Insufficient reason to modify the auditor’s report because of the lawyer’s obligation of confidentiality.
d. Proper grounds to withdraw from the management.
PSA 510 – Initial Engagements – Opening Balances
8. For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence that:
a. The opening balances do not contain misstatements that materially affect the current period’s financial
statements.

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 b. The prior period’s closing balances have been correctly brought forward to the current period or, when
appropriate, have been restated.
c. Appropriate accounting policies are consistently applied or changes in accounting policies have been
properly accounted for and adequately disclosed.
d. All of the above.
9. Opening balances means those account balances which exist at the beginning of the period. These are
based upon the closing balances of the prior period and reflect the effects of:
I. Current transactions (e.g. stock dividends) that will be given retroactive effect recognition.
II. Transactions of prior periods.
III .Accounting policies applied in the prior period.
a. All of these c. I only
b. I and II only d. II and III only
10. Which of the following is least considered in determining the sufficiency and appropriateness of the
audit evidence that the auditor will obtain regarding opening balances?
a. The length of years in operations of the entity.
b. The materiality of the opening balances relative to the current period’s financial statements.
c. The accounting policies adopted by the entity.
d. The risk of misstatements of accounts.
11. Which of the following accounts is more difficult for the auditor to be satisfied as to balance at the
beginning of the period?
a. Accounts receivable c. Inventory
b. Accounts payable d. Accrued interest payable
12. If, after performing necessary audit procedures, the auditor is unable to obtain sufficient appropriate
audit evidence concerning opening balances, the auditor’s report should include:
I. A qualified opinion
II. A disclaimer of opinion
III. An opinion which is qualified or disclaimed regarding the results of operations and cash flows and
unqualified regarding financial position.
a. Any of the above c. Either I or II
b. None of the above d. I only
13. If the opening balances contain misstatements which could materially affect the current period’s
financial statements and the effect of the misstatement is not properly accounted for and adequately
disclosed the auditor should express a
a. Unqualified opinion with explanatory paragraph
b. Qualified or adverse opinion
c. Qualified or disclaimer of opinion
d. Adverse or disclaimer of opinion
14. If the current period’s accounting policies have not been consistently applied in relation to opening
balances and if the change has not been properly accounted for and adequately disclosed, the auditor
should express
a. Unqualified opinion with explanatory paragraph
b. Qualified or adverse opinion
c. Qualified or disclaimer of opinion
d. Adverse or disclaimer of opinion
PSA 540- Audit of Accounting Estimates
15. It means an approximation of the amount of an item in the absence of a precise means of measurement
a. Accounting estimate c. Accounting error
c. Accounting policy d. Accounting change
16. The auditor should adopt one or a combination of the following approaches in the audit of an
accounting estimate:
I. Review and test the process used by management to develop the estimate.
II. Use an independent estimate for comparison with that prepared by management.
III. Review subsequent events which confirm the estimate made.
a. Any of the above c. Either I or II
b. None of the above d. I only
17.In evaluating the assumptions on which the estimate is based, the auditor would need to pay particular
attention to assumptions which are
a. Reasonable in light of actual results in prior periods.
b. Consistent with those used for other accounting estimates.
c. Consider with management’s plans which appear appropriate.
d. Subjective or susceptible to material misstatement.

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PSA 545 –Auditing Fair Value Measurements and Disclosures
18. Which statement is incorrect regarding auditing fair value measurements and disclosures?
a. The auditor should obtain sufficient appropriate audit evidence that fair value measurements and
disclosures are in accordance with GAAP in the Philippines.
b. Many measurements based on estimates, including fair value measurements, are inherently imprecise.
c. The auditor’s consideration of such assumptions is based on information available to the auditor at the
time f the audit.
d. The auditor is responsible for predicting future conditions, transactions or events which, had they
been known at the time of the audit, may have had a significant effect on management’s actions or
management’s assumptions underlying the fair value measurements and disclosures.
19. Which statement is incorrect regarding fair value measurements?
a. Underlying the concept of fair value measurements is a presumption that the entity is a going concern.
b. Fair value is normally the amount that an entity would receive or pay in a forced transaction,
involuntary liquidation, or distress sale.
c. The measurement of fair value may be relatively simple for assets that are bought and sold in active
and open markets.
d. The estimation of fair value may be achieved through the use of a valuation model or through the
assistance of an expert, such as an independent appraiser.
20. The degree to which a fair value measurement is susceptible to misstatement is a(an)
a. Audit risk c. Control risk
b. Inherent risk d. Detection risk
21. Regarding fair value measurements and disclosures, the auditor is not required to
a. Obtain evidence about management’s intent to carry out specific courses of action, and consider its
ability to do so, where relevant to the fair value measurements and disclosures under GAAP in the
Philippines.
b. Evaluate whether the entity’s method for its fair value measurements is applied consistently.
c. Use the work of an expert.
d. Test the entity’s fair value measurements and disclosures.
22. Which of the following is ordinarily the best evidence of fair value?
a. Published price quotations in an active market.
b. Discounted cash flow analysis.
c. Comparative transaction model
d. None of the above.
23. When testing the entity’s fair value measurements and disclosures, the auditor evaluates whether:
a. The assumptions used by management are reasonable.
b. The fair value measurement was determined using an appropriate model, if applicable.
c. Management used relevant information that was reasonably available at the time.
d. All of the above.
PSA 550-Related Parties
24. Which statement is incorrect regarding the auditor’s responsibilities and procedures regarding related
parties and transactions with such parties?
a. The auditor should perform audit procedures designed to obtain sufficient appropriated audit evidence
regarding the identification and disclosure by management of related parties and the effect of related
party transactions that are material to the financial statement.
b. An audit cannot be expected to detect all related party transactions.
c. The auditor is responsible for the identification and disclosure of related parties and transactions
with such parties.
d. The auditor needs to have level of knowledge of the entity’s business and industry that will enable
identification of the events, transactions and parties that may have a material effect on the financial
statements.
25. 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.
26. Which of the following least likely indicates the existence of previously unidentified related parties?
a. Transactions which have abnormal terms of trade, such as unusual prices, interest rates, guarantees,
and repayment terms.
b. Transactions which lack an apparent logical business reason for their occurrence.
c. Transactions in which substance does not differ from form.
d. Unrecorded transactions such as the receipt or provision of management services at no change.

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