1

ASSURANCE PRINCIPLES
MIDTERM QUIZ 1 (MULTIPLE CHOICE)

C. Gonzaga

Write the letter of your choice in CAPITAL LETTER without any erasures.
1. Section 5 of the Accountancy Act of 2004 states that the Board of Accountancy shall be composed of a chairman and
a. 2 members
b. 4 members c. 6 members d. 8 members
2. The members of the Board of Accountancy shall be appointed by the
a. Philippine Institute of CPAs (PICPA)
b. Professional Regulations Commission (PRC)
c. President of the Philippines
d. Association of CPAs in Public Practice (ACPAPP)
3. A member of the BOA shall be, at the time of his/her appointment, must possess which of the following qualifications?
a. Must be a natural-born citizen of the Philippines
b. Must be a Filipino citizen
c. Must be a Filipino citizen and a resident of the Philippines
d. Must be a natural-born citizen and a resident of the Philippines
4. Republic Act 9298 is known as the:
a. Revised Accountancy Law
b. Revised Accountancy Act
c. Philippine Accountancy Act of 2004
d. Philippine Accountancy Law of 2004
5. Which of the following is NOT an objective of the Republic Act 9298?
a. The standardization and regulation of accounting education.
b. The development and improvement of accounting standards that will be generally accepted in the Philippines.
c. The supervision, control, and regulation of the practice of accountancy in the Philippines.
d. The examination for registration of certified public accountants.
6. An applicant for the CPA licensure examination should be
I. A Filipino citizen
II .Of good moral character
III. A holder of a degree of Bachelor of Science in Accountancy
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III.
7. Professional skepticism requires that an auditor assumes that management is
1. Honest, in the absence of fraud risk factors.
2. Dishonest until completion of audit tests.
3. Neither honest nor dishonest.
4. Offering reasonable assurance of honesty.
8. Which of the following is explicitly cited in the R.A. 9298?
a. The Professional Regulation Commission has the authority to replace any member of the Board of Accountancy
for negligence, incompetence, or any other just cause.
b.Insolvency is a ground for proceedings against a CPA.
c. A person shall be considered to be in the professional practice of accounting if, as an officer in a private
enterprise, he makes decisions requiring professional accounting knowledge.
d. After three years, subject to certain conditions, the Board of Accountancy may order the reinstatement of a CPA
whose certificate of registration has been revoked.
9. A study, appraisal, or review by the BOA or its duly authorized representatives, of the quality of audit of financial
statements through a review of the quality control measures instituted by an Individual CPA, Firm or Partnership of
CPAs engaged in the practice of public accountancy.
a. Peer review
c. Analytical review
b. Quality review
d. Administrative review
10. How many CPE credit units must be accumulated by a registered accounting professional within the 3-year period?
a. 15 credit units
c. 45 credit units
b. 60 credit units
d. 90 credit units
11. Detection of noncompliance, regardless of materiality, requires considerations of the following:
a
b
c
Integrity of management
Yes
Yes
Yes
Possible effect on other aspects of the audit.
Yes
Yes
No
Legal determination of the act of non-compliance.
Yes
No
Yes

d
No
Yes
No

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12. Which statement is incorrect regarding the auditors communications of audit matters with those charged with
governance?
a. The auditors 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 charged with
governance.
c. The auditors communications with those charged with governance may be made orally or in writing.
d. The audit communication to be effective must be a two-way effect.
13. When an auditor believes that an 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.
14. Kiko, CPA is applying for renewal of his professional license. He is temporarily exempted from the CPE requirements
a. If he is at least 65 years old.
b. If he is working abroad and he has been out of the country for at least two years immediately prior to the date of
renewal.
c. Either a or b.
d. Under no circumstances.
15. Ronald & Co., a large international CPA firm, is to have an external peer review. The peer review will most likely be
performed by
a. Audit review staff of the Securities and Exchange Commission.
b. Audit review staff of the Philippine Institute of Certified Public Accountants.
c. Employees and partners of another CPA firm.
d. Employees and partners of Ronald & Co. who are not associated with the particular audits being reviewed.
16. A CPA firm's quality control procedures pertaining to the acceptance of a 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 an
opinion.
d. Consideration of whether the internal control structure is sufficiently effective to permit a reduction in the extent of
required substantive tests.
17. Which of the following should the auditor likely to do when the application of planned audit procedures indicates the
possible existence of fraud or error?
a. The auditor should resign in order to avoid legal responsibility.
b. He should discuss the matter with the person whom he believes is involved with the irregularities.
c. He should consider the potential effect on the financial statements.
d. He should refer the suspected fraud or error to the internal auditor.
18. 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.
19. 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 in partner and/or staff involved in the audit engagement.
b. A change in the terms of engagement.
c. A recent change of client management.
d. A significant change in the nature or size of the client's business.
20. As used in auditing, which of the following statements best describes "assertions"?
a. Assertions are the representations of management as to the reliability of the information system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial statements.
d. Assertions are found only in the footnotes to the financial statements
21. Which of the following ultimately determines the specific audit procedures necessary to provide an independent
auditor with a reasonable basis for the expression of an opinion?
a. The audit program.
b. The auditor's judgment.
c. Generally accepted auditing standards.
d. The auditor's working papers.

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22. If the client refuses to accept an audit report that is qualified due to a known existence of an illegal act, the auditor
should
a. Issue an adverse opinion if management agrees to fully disclose the matter
b. Withdraw from the engagement and communicate the reasons to the audit committee in writing
c. Withdraw from the engagement and communicate the reasons to the Securities and Exchange Commission or
other regulatory body in writing
d. Issue an unqualified opinion if management agrees to fully disclose the matter
23. Ultimately, the decision about whether or not an auditor is independent must be made by the
a. Auditor
b. audit committee
c. client
d. public
24. Which of the following attributes is required of an auditor in relation to audit clients?
a. Rationalization
b. Bias
c. Loyalty
d. Independence
25. To be independent, the auditor
a. Cannot place any reliance on the clients verbal and written assertions
b. Is responsible only to third-party users of the financial statements
c. Cannot perform any other professional services for an audit client
d. Must be impartial when dealing with the client
26. One of the advantages of the fixed fee (or flat sum) basis of billing a client is that the
a. Fixed fee method is particularly effective for measuring charges for routine engagements.
b. CPAs compensation is more directly related to the quality of his service rather than to time spent.
c. CPA is assured of avoiding a loss on the engagement even if he underestimates his costs.
d. Client pays for exactly what he gets in terms of work performed
27. The auditors responsibility for the detection of clients noncompliance with laws and regulations is:
a. Greater than for errors or fraud
b. Less than it is for errors or fraud
c. Restricted to information that comes to his attention
d. The same as it is for errors or fraud
e.
28. Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatement due to
Errors
Fraudulent financial reporting Misappropriation of assets
a. Yes
Yes
Yes
b. Yes
Yes
No
c. Yes
No
Yes
d. No
Yes
No
29. Practitioners independence
a. minimize risk
b. helps achieve public confidence
c. defends against professional liability
d. achieves compliance with the standards of fieldwork
30. Due professional care requires:
a. an auditor to exercise reasonable prudence in his work
b. the examination of all corroborating evidence available
c. the exercise of error-free judgment
d. a consideration of internal control structure that includes tests of controls
31. The exercise of due professional care requires that an auditor
a. Examine all available corroborating evidence
b. Critically review the judgment exercised at every level of supervision
c. Reduce control risk below the maximum
d. Attain the proper balance of professional experience and formal education
32. Assurance engagement risk is the risk
a. That the practitioner expresses an inappropriate conclusion when the subject matter information is materially
misstated.
b. Of expressing an inappropriate conclusion when the subject matter information is not materially misstated.
c. Through loss from litigation, adverse publicity, or other events arising in connection with a subject matter reported
on.
d. Of expressing an inappropriate conclusion when the subject matter information is either materially misstated or
not materially misstated.
33. The Code of Ethics for Professional Accountants is divided into three parts. Which of the following is not one of those
parts?
a. A part that applies to employed professional accountants
b. A part that applies only to those professional accountants in public practice
c. A part that applies to all auditors
d. A part that applies to all professional accountants

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34. What is the first step taken in case the policies of the accountant's employing organization do not resolve an ethical
conflict?
a. Review the conflict with your supervisor's supervisor
b. Seek counseling and advice on a confidential basis with an independent adviser
c. Review the conflict problem with the immediate superior
d. Submit an information memorandum describing the conflict to an appropriate representative of that organization
35. The 'Code of Ethics for Professional Accountants', Section 8 discusses independence in assurance services in terms
of a principles-based approach that takes into account:
a. Knowledge of the audit client's industry
b. Threats to competence
c. The public interest
d. Audit firm financial safeguards
36. Which of the following is not correct about independence of mind?
a.
b.
c.
d.

It permits the provision of an opinion without being affected by influences that compromise professional judgment
It allows an individual to act with integrity
It is the exercise of objectivity and professional skepticism
It is the state of mind that creates confidence in the auditor

37. Which of the following would be considered a 'self-interest threat'?

a. Acting as the client's advocate in a legal proceeding
b. Potential employment with an assurance client
c. When a member of the assurance team was previously a director or officer of the assurance client
d. A member of the assurance team has a close family member who is a director or officer of the assurance client
38. Ownership of 10 shares of an audit client and ownership by an auditor of a small part of a joint venture in which a
secretary at the audit client also owns shares are examples of:
a. Lack of independence in appearance
b. Violation of Philippine Standards on Auditing (PSA)
c. Substance over form
d. Lack of independence in fact
39. Financial involvement with a client will affect independence and may lead a reasonable observer to conclude that
independence has been impaired. Which of the following is not a form of financial involvement with a client?
a.
b.
c.
d.

Loans to or from the client

Fees paid for audit engagement
Financial interest in a joint venture with a client
Financial interest resulting from being an administrator of any trust with a financial interest in the client

40. Which of the following is not something performed by the company's Board?
a. Supervises product production
b. Oversees the companys Management and ensures the quality of information provided to shareholders and to financial
markets through the financial statements

c. Appoints the corporate officers responsible for managing the company and implementing this strategy
d. Defines the company's strategy
41. A director is independent when:
a. S/he represents the shareholders and not other constituencies
b. S/he has no relationship of any kind whatsoever with the corporation, its group or the management of either that is such as to
colour his/her judgment

c. S/he is a top executive of the company supervised

d. S/he owns no ordinary shares in the company supervised
42. Which of the following is not a responsibility of the Boards Audit Committee?
a.
b.
c.
d.

Corporate reporting
Monitoring management
Management compensation
Relations with the independent auditor

43. A CPA shall not disclose confidential information obtained during an audit engagement in which one of the following
situations?
a. In defense of himself when sued by his client.
b. When the security of the State so requires.
c. To a successor auditor without the clients permission.
d. With the consent of the client.
44. The preparation of accounting records or financial statements for an audit client will most likely create
a. Familiarity threat b.Self-interest threat c.Intimidation threat
d.Self-review threat
45. The communication to the public of facts about a professional accountant which are not designed for the deliberate
promotion of the professional accountant is called
a. Announcements
b. Advertising c. Publicity
d. Solicitation

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46. When a professional accountant performs services in a country other than the home country and differences on
specific matters exist between ethical requirements of the two countries, the professional accountant should apply
a. The ethical requirements of his or her home country.
b. The ethical requirements of the country in which services are being performed.
c. The less strict ethical requirements.
d. The stricter of the two ethical requirements.
47. The responsibility for the detection and prevention of errors, fraud and noncompliance with laws and regulations rests
with
a. Clients legal counsel
c. Clients Management
b. Clients internal auditor
d. Independent auditor
48. A professional accountant in public practice is allowed to
a. Refer to use or cite actual or purported testimonials by third parties.
b. Publish services in billboard (e.g. tarpaulin, streamers, etc.) advertisements.
c. Publish and compare fees with other CPAs or CPA firms or compare those services with those provided by
another firm or CPA practitioner.
d. Inform interested parties through any medium that a partnership or salaried employment of an accountancy
nature is being sought.
49. In cases when the threat to independence is significant and no safeguards are available to reduce it to an acceptable
level, which of the following actions should be taken?
I.
II.
a. I only

Eliminating the activities or interest creating the threat.

Refusing to accept or continue the assurance engagement.
b. II only

c. Either I or II

d. Neither I nor II

50. According to the Code of Ethics, professional competence may be divided into two phases: attainment of professional
competence and maintenance of professional competence. The attainment of professional competence requires the
following, except:
a. A high standard of general education
b. Specific education, training, and examination in professionally relevant subjects
c. Whether prescribed or not, a period of work experience.
d. A continuing awareness and an understanding of relevant technical professional and business developments.
MITERM QUIZ 2
TEST 1 (MULTIPLE CHOICE. Write the letter of your choice in CAPITAL LETTER without any erasures.)
1. Which of the following is an example of a safeguard implemented by the client that might mitigate a threat
to independence?
a. Required continuing education for all attest engagement team members.
b. An effective corporate governance structure.
c. Required second partner review of an attest engagement.
d. Management selection of the CPA firm.
2. Which of the following is a self review threat to member independence?
a. An engagement team member has a spouse that serves as CFO of the attest client.
b. A second partner review is required on all attest engagements.
c. An engagement team member prepares invoices for the attest client.
d. An engagement team member has a direct financial interest in the attest client.
3. According to the standards of the profession, which of the following circumstances will prevent a CPA
performing audit engagements from being independent?
a. Obtaining a collateralized automobile loan from a financial institution client.
b. Litigation with a client relating to billing for consulting services for which the amount is immaterial.
c. Employment of the CPAs spouse as a clients director of internal audit.
d. Acting as an honorary trustee for a not-for-profit organization client.
4. The professions ethical standards most likely would be considered to have been violated when a CPA
represents that specific consulting services will be performed for a stated fee and it is apparent at the time
of the representation that the
a. Actual fee would be substantially higher.
b. Actual fee would be substantially lower than the fees charged by other CPAs for comparable services.
c. CPA would not be independent.
d. Fee was a competitive bid.
5. According to the ethical standards of the profession, which of the following acts is generally prohibited?
a. Issuing a modified report explaining a failure to follow a governmental regulatory agencys standards when
conducting an attest service for a client.
b. Revealing confidential client information during a quality review of a professional practice by a team from the
state CPA society.
c. Accepting a contingent fee for representing a client in an examination of the clients tax return

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by a BIR agent.
d. Retaining client records after an engagement is terminated prior to completion and the client has demanded
their return.
6. May a CPA hire for the CPAs public accounting firm a non-CPA systems analyst who specializes in developing
computer systems?
a. Yes, provided the CPA is qualified to perform each of the specialists tasks.
b. Yes, provided the CPA is able to supervise the specialist and evaluate the specialists end product.
c. No, because non-CPA professionals are not permitted to be associated with CPA firms in public practice.
d. No, because developing computer systems is not recognized as a service performed by public accountants.
7. Stephanie Sales is a CPA who is working as a controller for Brentwood Corporation. She is not in public
practice. Which statement is true?
a. She may use the CPA designation on her business cards if she also puts her employment title on them.
b. She may use the CPA designation on her business cards as long as she does not mention Brentwood
Corporation or her title as controller.
c. She may use the CPA designation on company transmittals but not on her business cards.
d. She may not use the CPA designation because she is not in public practice.
8. According to the ethical standards of the profession, which of the following acts is generally prohibited?
a. Purchasing a product from a third party and reselling it to a client.
b. Writing a financial management newsletter promoted and sold by a publishing company.
c. Accepting a commission for recommending a product to an audit client.
d. Accepting engagements obtained through the efforts of third parties.
9. To exercise due professional care an auditor should
a. Critically review the judgment exercised by those assisting in the audit.
b. Examine all available corroborating evidence supporting managements assertions.
c. Design the audit to detect all instances of illegal acts.
d. Attain the proper balance of professional experience and formal education.
10. Which of the following statements is correct regarding an accountants working papers?
a. The accountant owns the working papers and generally may disclose them as the accountant sees fit.
b. The client owns the working papers but the accountant has custody of them until the accountants bill is paid
in full.
c. The accountant owns the working papers but generally may not disclose them without the clients consent or
a court order.
d. The client owns the working papers but, in the absence of the accountants consent, may not disclose them
without a court order.
11. What assurance does the auditor provide that misstatements due to errors, fraud, and direct effect illegal
acts that are material to the financial statements will be detected?
Errors
a. Limited
b. Limited
c. Reasonable
d. Reasonable

Direct effect
Fraud
Illegal acts
Negative
Limited
Limited
Reasonable
Limited
Limited
Reasonable
Reasonable

12. Before accepting an engagement to audit a new client, a CPA is required to obtain
a. An understanding of the prospective clients industry and business.
b. The prospective clients signature to the engagement letter.
c. A preliminary understanding of the prospective clients control environment.
d. The prospective clients consent to make inquiries of the predecessor auditor, if any.
13. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding
a. Disagreements the predecessor had with the client concerning auditing procedures and accounting
principles.
b. The predecessors evaluation of matters of continuing accounting significance.
c. The degree of cooperation the predecessor received concerning the inquiry of the clients lawyer.
d. The predecessors assessments
14. Based on the IFAC Code of Ethics for Professional Accountants, threats to independence arise from all of the
following except:
a. Self interest.
b. Advocacy.
c. The audit relationship.
d. Intimidation.
15. If an audit firm discovers threats to independence with respect to an audit engagement, the IFAC Code of
Ethics for Professional Accountants indicates that the firm should
a. Immediately resign from the engagement.
b. Notify the appropriate regulatory body.
c. Document the issue.
d. Evaluate the significance of the threats and apply appropriate safeguards to reduce them to an
acceptable level.

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16. With respect to the acceptance of contingent fees for professional services, the IFAC Code of Ethics for
Professional Accountants indicates that the accounting firm
a. Should not accept contingent fees.
b. Should establish appropriate safeguards around acceptance of a contingent fee.
c. Should accept contingent fees only for assurance services other than audits of financial statements.
d. Should accept contingent fees if it is customary in the country.
17. With regard to marketing professional services, the IFAC Code of Ethics for Professional Accountants
indicates that
a. Direct marketing is prohibited.
b. Marketing is allowed if lawful.
c. Marketing should be honest and truthful.
d. Marketing of audit services is prohibited.
18. An auditor, while performing an audit, strives to achieve the appearance of independence in order to

a.
b.
c.
d.

Reduce risk and liability.

Comply with the generally accepted standards of fieldwork.
Become independent in fact.
Maintain public confidence in the profession.

19. Competence as a certified public accountant includes all of the following except

a.
b.
c.
d.

Having the technical qualifications to perform an engagement.

Possessing the ability to supervise and evaluate the quality of staff work.
Warranting the infallibility of the work performed.
Consulting others if additional technical information is needed.

20. Ultimately, the decision about whether or not an auditor is independent must be made by the

a. Auditor.

b. Client.

c. Audit committee.

d. Public.

21. Madison Corporation has a few large accounts receivable that total P1,000,000. Nassau Corporation has a great

number of small accounts receivable that also total P1,000,000. The importance of an error in any one account is,
therefore, greater for Madison than for Nassau. This is an example of the auditor's concept of
a. Account bias.
b. Audit risk.
c. Materiality.
d. Reasonable assurance.
22. The "hallmark" of auditing is

a.
b.
c.
d.

Available audit technology.

Generally accepted auditing standards.
Professional judgment.
Materiality and audit risk.

23. The objective of quality control mandates that a public accounting firm should establish policies and procedures for

professional development that provide reasonable assurance that all entry-level personnel
a. Prepare working papers that are standardized in form and content.
b. Have the knowledge required to enable them to fulfill responsibilities assigned.
c. Will advance within the organization.
d. Develop specialties in specific areas of public accounting.
24. In pursuing its quality control objectives with respect to assigning personnel to engagements, a public accounting firm

may use policies and procedures such as

a. Rotating employees from assignment to assignment on a random basis to aid in the staff training effort.
b. Requiring timely identification of the staffing requirements of specific engagements so that enough qualified
personnel can be made available.
c. Allowing staff to select the assignments of their choice to promote better client relationships.
d. Assigning a number of employees to each engagement in excess of the number required so as not to overburden
the staff and interfere with the quality of the audit work performed.
25. A public accounting firm studies its personnel advancement experience to determine whether individuals meeting

stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to
a. Generally accepted auditing standards.
b. Attestation standards.
c. Supervision and review.
d. Quality control standards.
TEST 2
Assume that you are analyzing relationships for your firm to identify situations in which an auditors
independence may be impaired. For each of the following numbered situations, determine whether the auditor
(a covered member in the situation) is considered to be independent. If the auditors independence would not
be impaired answer No. If the auditors independence would be impaired answer Yes.
1.
2.
3.
4.

The
The
The
The

auditor
auditor
auditor
auditor

is a cosigner of a clients checks.

is a member of a country club which is a client.
owns a large block of stock in a client but has placed it in a blind trust.
placed her checking account in a bank which is her client. The account is fully insured by a PDIC.

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5.
6.
7.
8.

The
The
The
The

client has not paid the auditor for services for the past two years.
auditor is leasing part of his building to a client.
auditor joins, as an ordinary member, a trade association which is also a client.
auditor has an immaterial, indirect financial interest in the client.

TEST 3 (IDENTIFICATION)
Instruction: Give the complete term or terminology. Make no erasures.
1.________________ An engagement in which accounting expertise, as opposed to auditing expertise, is used to collect,
classify and summarize financial information.
2. ________________The framework of rules, systems and processes in the corporation that governs the performance by
the Board of Directors and Management of their respective duties and responsibilities to the stockholders.
3. ________________The system established by the Board of Directors and Management for the accomplishment of the
corporations objectives, the efficient operation of its business, the reliability of its financial reporting, and faithful
compliance with applicable laws, regulations and internal rules.
4. ________________ An engagement in which a practitioner expresses a conclusion designed to enhance the degree of
confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of
a subject matter against criteria.
5. _________________An independent and objective assurance activity designed to add value to and improve the
corporations operations, and help it accomplish its objectives by providing a systematic and disciplined approach in the
evaluation and improvement of the effectiveness of risk management, control
and governance processes.
6.______________ The avoidance of facts and circumstances that are so significant a reasonable and informed third
party, having knowledge of all relevant information, including any safeguards applied, would reasonably conclude a firms,
or a member of the assurance teams, integrity, objectivity or professional skepticism had been compromised.
7. _________________ An attitude that includes a questioning mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, and a critical assessment of evidence.
8. _________________ The body given the authority by the Board of Directors to implement the policies it has laid down
in the conduct of the business of the corporation.
9. ______________ The objective of this engagement is to enable an auditor to state whether, on the basis of procedures
which do not provide all the evidence that would be required in an audit, anything has come to the auditors attention that
causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an
applicable financial reporting framework.
10. _________________ All partners and staff performing the engagement, and any individuals engaged by the firm or a
network firm who perform procedures on the engagement. This excludes external experts engaged by the firm or a
network firm.
11. _________________ The governing body elected by the stockholders that exercises the corporate powers of a
corporation, conducts all its business and controls its properties.
12. _____________ Representations by management, explicit or otherwise, that are embodied in the financial statements,
as used by the auditor to consider the different types of potential misstatements that may occur.
13. _____________ A document issued by an entity, ordinarily on an annual basis, which includes its financial statements
together with the auditors report thereon.
14. ________________ Financial statements5 audited by the auditor in accordance with PSAs, and from which the
summary financial statements are derived.
15. ________________ The partner or other person in the firm who is responsible for the engagement and its
performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority
from a professional, legal
or regulatory body.
16. ________________ A director who is also the head of a department or unit of the corporation or performs any work
related to its operation (as per SEC Code of Corporate Governance).
17. _____________ Written terms of an engagement in the form of a letter.
18. _________________ An intentional act by one or more individuals among management, those charged with
governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.
19. _________________ The state of mind that permits the provision of an opinion without being affected by influences
that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and
professional skepticism.
20. _________________ Those individuals who perform the activities of the internal audit function.
MID-TERM QUIZ 3 (MULTIPLE CHOICE. Write the answer in CAPITAL LETTER ONLY.)
1.

With respect to the auditor's planning of a year-end examination, which of the following statements is always true?
a.
b.
c.
d.

An engagement should not be accepted after the fiscal year-end.

An inventory count must be observed at the balance sheet date.
The client's audit committee should not be told of the specific audit procedures that will be performed.
It is an acceptable practice to carry out substantial parts of the examination at interim dates.

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2. In planning an audit engagement, which of the following affects the independent auditor's judgment as to the quantity,
type, and content of working papers?
a.
b.
c.
d.

The estimated occurrence rate of attributes.

The preliminary evaluations based on substantive testing.
The content of the client's representation letter.
The anticipated nature of the auditor's report.

3. In pursuing its quality control objectives with respect to acceptance of a client, a CPA firm is not likely to
a.
b.
c.
d.

Make inquiries of the proposed client's legal counsel.

Review financial statements of the proposed client.
Make inquiries of previous auditors.
Review the personnel practices of the proposed client.

4. The independent auditor's plan for an audit in accordance with generally accepted auditing standards is influenced by
the possibility of material errors. The auditor will therefore conduct the examination with an attitude of
a. Professional skepticism.
b. Subjective mistrust.
c. Objective indifference.
d. Professional responsiveness.
5. Financial statement assertions are established for account balances,
Classes of transactions Disclosures
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
6. Which of the following is not a financial statement assertion relating to account balances?
a. Completeness.
b. Existence.
c. Rights and obligations.
d. Valuation and competence.
7. As the acceptable level of detection risk decreases, an auditor may
a. Reduce substantive testing by relying on the assessments of inherent risk and control risk.
b. Postpone the planned timing of substantive tests from interim dates to the year-end.
c. Eliminate the assessed level of inherent risk from consideration as a planning factor.
d. Lower the assessed level of control risk from the maximum level to below the maximum.
8. The risk that an auditor will conclude, based on substantive tests, that a material misstatement does not exist in an
account balance when, in fact, such misstatement does exist is referred to as
a. Sampling risk.
b. Detection risk.
c. Nonsampling risk.
d. Inherent risk.
9. As the acceptable level of detection risk decreases, the assurance directly provided from
a. Substantive tests should increase.
b. Substantive tests should decrease.
c. Tests of controls should increase.
d. Tests of controls should decrease.
10. Which of the following audit risk components may be assessed in nonquantitative terms?
Control risk
Detection risk Inherent risk
a.
Yes
Yes
No
b.
Yes
No
Yes
c.
Yes
Yes
Yes
d.
No
Yes
Yes
11. Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditors discretion.
12. Relationship between control risk and detection risk is ordinarily
a. Parallel.
b. Inverse.
c. Direct.
d. Equal.

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13. Which of the following would an auditor most likely use in determining the auditors preliminary judgment about
materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entitys annualized interim financial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.
14. In considering materiality for planning purposes, an auditor believes that misstatements aggregating P10,000 would
have a material effect on an entitys income statement, but that misstatements would have to aggregate P20,000 to
materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be
expected to detect misstatements that aggregate
a. P10,000
b. P15,000
c. P20,000
d. P30,000
15. Which of the following would an auditor most likely use in determining the auditors preliminary judgment about
materiality?
a. The results of the initial assessment of control risk.
b. The anticipated sample size for planned substantive tests.
c. The entitys financial statements of the prior year.
d. The assertions that are embodied in the financial statements.
16. Holding other planning considerations equal, a decrease in the amount of misstatement in a class of transactions that
an auditor could tolerate most likely would cause the auditor to
a. Apply the planned substantive tests prior to the balance sheet date.
b. Perform the planned auditing procedures closer to the balance sheet date.
c. Increase the assessed level of control risk for relevant financial statement assertions.
d. Decrease the extent of auditing procedures to be applied to the class of transactions.
17. When issuing an unqualified opinion, the auditor who evaluates the audit findings should be satisfied that the
a. Amount of known misstatement is documented in the management representation letter.
b. Estimate of the total likely misstatement is less than a material amount.
c. Amount of known misstatement is acknowledged and recorded by the client.
d. Estimate of the total likely misstatement includes the adjusting entries already recorded by the client.
18. An attitude that includes a questioning mind and a critical assessment of audit evidence is referred to as
a. Due professional care.
b. Professional skepticism.
c. Reasonable assurance.
d. Supervision.
19. Professional skepticism requires that an auditor assume that management is
a. Honest, in the absence of fraud risk factors.
b. Dishonest until completion of audit tests.
c. Neither honest nor dishonest.
d. Offering reasonable assurance of honesty.
20. . Which of the following is an example of fraudulent financial reporting?
a. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods
sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account,
thus overstating expenses.
c. An employee steals inventory and the shrinkage is recorded in cost of goods sold.
d. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous
operating expense.
21. Which of the following best describes what is meant by the term fraud risk factor?
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presence often have been observed in circumstances where frauds have occurred.
c. Factors whose presence requires modification of planned audit procedures.
d. Material weaknesses identified during an audit.
22. When performing a financial statement audit, auditors are required to explicitly assess the risk of material
misstatement due to
a. Errors.
b. Fraud.
c. Illegal acts.
d. Business risk.
23. An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected for all of the
following except
a. Employee collusion.
b. Falsified documentation.
c. Need to apply professional judgment in evaluating fraud risk factors.

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d. Professional skepticism.
24. The most difficult type of misstatement to detect is fraud based on
a. The overrecording of transactions.
b. The nonrecording of transactions.
c. Recorded transactions in subsidiaries.
d. Related-party receivables.
25. When considering fraud risk factors relating to managements characteristics, which of the following is least likely to
indicate a risk of possible misstatement due to fraud?
a. Failure to correct known reportable conditions on a timely basis.
b. Nonfinancial managements preoccupation with the selection of accounting principles.
c. Significant portion of managements compensation represented by bonuses based upon achieving unduly aggressive
operating results.
d. Use of unusually conservative accounting practices.
26. Which of the following conditions identified during fieldwork of an audit is most likely to affect the auditors assessment
of the risk of misstatement due to fraud?
a. Checks for significant amounts outstanding at year-end.
b. Computer generated documents.
c. Missing documents.
d. Year-end adjusting journal entries.
27. Which of the following is most likely to be a response to the auditors assessment that the risk of material
misstatement due to fraud for the existence of 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 yearend.
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.
28. Which of the following is most likely to be an example of fraud?
a. Defalcations occurring due to invalid electronic approvals.
b. Mistakes in the application of accounting principles.
c. Mistakes in processing data.
d. Unreasonable accounting estimates arising from oversight.
29. Which of the following characteristics most likely would heighten an auditors 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 entitys stock.
c. Management places substantial emphasis on meeting earnings projections.
d. The rate of change in the entitys industry is slow.
30.
a.
b.
c.
d.

In a financial statement audit, audit risk represents the probability that

Internal control fails and the failure is not detected by the auditor's procedures.
The auditor unknowingly fails to modify an opinion on materially misstated financial statements.
Inherent and control risk cause errors that could be material to the financial statements.
The auditor is not retained to conduct a financial statement audit in the succeeding year.

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First Trimester SY 2016-2017

Assurance Principles
ANSWER SHEET
MID-TERM QUIZ 1 and 2
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