Philippine School of Business

Administration
826 R. Papa St. Sampaloc, Manila

First Pre-board CPA REVIEW

Examination Auditing Theory
October 2007 Batch August 11, 2007

Directions: Mark with a vertical line using pencil no. 2 the letter of your choice in
the answer sheet provided.

1. The essence of attest function is to

A. Examine individual transactions so that the auditor may certify as to their
validity.
B. Determine whether the clients financial statements are fairly stated.
C. Assure the consistent application of correct accounting procedures.
D. Detect fraud.

2. Which statement is incorrect regarding the auditors consideration of laws and

regulations in an audit of financial statements?
A. If the auditor concludes that the non-compliance 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
B. 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
C. The auditor may withdraw from the engagement when the entity does not
take the remedial action that auditor considers necessary in the
circumstances, even when non-compliance is not material to the financial
statements
D. When the auditor becomes aware of the information concerning a possible
instance of non-compliance, the auditor should evaluate the possible effect
on the financial statements

3. Operational auditing is primarily oriented toward

A. The accuracy of data reflected in managements financial records.
B. The verification that a companys financial statements are fairly presented.
C. Assets protection by existing internal control.
D. Future improvements to accomplish the goals of management.

4. Effective internal control over unclaimed payroll checks that are kept by the
Treasury Department would include Accounting Department procedures that
require
A. Accounting for all unclaimed wages in a current liability account
B. Effective cancellation and stop payment orders for the related checks
C. Preparation of a list of unclaimed wages on a periodic basis
D. Periodic accounting for the actual checks representing unclaimed wages
 5. Which one of the following procedures would not be appropriate for an auditor in
discharging his or her responsibilities concerning the clients physical inventories?
A. Carrying-out physical inventory procedures at an interim date
B. Confirmation of goods in the hands of public warehouses
C. Obtaining written representation from the client as to the existence,
quality, and peso amount of the inventory
D. Supervising the taking of the annual physical inventory

6. The Code of Professional Ethics for CPAs states, in part, that a CPA should
maintain a high degree of integrity and objectivity in all his actuations.
Objectivity in said Code refers to a CPA ability
A. To be unyielding in all matters dealing with auditing procedures
B. To independently choose between alternate accounting principles and
auditing standards
C. To independently distinguish between accounting practices that are
acceptable and those that are not
D. To maintain an impartial attitude on all maters which come under the
CPAs review

7. 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 court
B. Under the rule against disclosing confidential information
C. When the security of the state so requires
D. With the consent of the client

8. Inclusion of which of the following in promotional brochure published by a public

accounting firm would be most likely to result in a violation of the rules of
conduct?
A. Educational and professional attainment of partners
B. Reprints of newspaper articles that praise the firms expertise
C. Services offered and fees for such services including hourly hour rates and
fixed fees
D. Testimonials and endorsements

9. Which of the following is not done by an auditor when obtaining an

understanding of an entity's internal controls?
A. Consider factors that affect the risk of material misstatements
B. Consider the operating effectiveness of the internal controls
C. Design substantive tests
D. Identify the types of potential misstatements that can occur

10. An auditor has concluded that a client's internal controls are well designed and
functioning as expected. Under these circumstances the auditor would most likely
A. Cease to perform further substantive tests
B. Increase the extent of planned analytical procedures
C. Not increase the extent of planned substantive tests
D. Perform all tests of controls to the extent outlined in the audit program

11. Which of the following most likely would heighten the auditors concern about the
risk of intentional manipulation of financial statements?
A. Insiders recently purchased additional shares of the entitys stock
B. Management places substantial emphasis on meeting earnings projections
C. The rate of change in the entity is low
D. Turnover of senior accounting personnel is low
12. A CPA has the duty to
A. Advise a client of errors contained in a previously filed tax return
B. Disclose client fraud to third parties
C. Perform an audit according to GAAP so that fraud will be uncovered
D. Provide a successor CPA in the event death or disability prevents audit
completion

13. Statement 1 Independence is unique to the auditors attest function.

Statement 2 The two aspects of auditors independence are independence of
mind and independence in mental attitude.

A. Both statements are true.

B. Both statements are false.
C. Statement 1 is true, statement 2 is false.
D. Statement 1 is false, statement 2 is true.

14. A CPA firm evaluates its personnel advance experience to ascertain whether
individuals meeting stated criteria are assigned degrees of responsibility. This is
evidence of the firms adherence to which of the following prescribed standards
A. Accounting and review services
B. Professional ethics
C. Supervision and review
D. Quality control

15. While performing tax services for a new client, the CPA discovered a material
error in a previously filed tax return prepared by another CPA. In such a case, he
should
A. Advise the client to file a corrected return regardless of whether or not the
error resulted in an overstatement or understatement of tax
B. Inform the BIR of the error
C. Prepare an affidavit with respect to the error
D. Recommend compensating for the prior years error in the current years
tax return where such action will mitigate the clients cost and
inconvenience

16. A violation of the professional ethical standards would most likely occur when a
CPA
A. Is also admitted to the Bar represents on letterhead to be both an attorney
and a CPA
B. Is controller of a bank and permits the bank to use the controllers CPA
title in the listing of officers in its publications
C. Is the sole shareholder in a professional accountancy corporation uses the
designation and the company in the firm title
D. Writes a newsletter on financial management permitting a publishing
company to solicit subscriptions by direct mail

17. A company issued bonds for cash during the year under audit. To ascertain that
this transaction was properly recorded, the auditors best course of action is to
A. Confirm the results of the issuance with the underwriter or investment
banker
B. Trace the cash received from the issuance to the accounting records
C. Request a statement from the bond trustee as to the amount of the bonds
issued and outstanding
D. Verify that the net cash received is credited to the Bonds Payable account
18. An audit program for the examination of retained earnings account should
include a step that requires verification of the
A. Approval of the adjustment to the beginning balance as a result of a write-
down of account receivable
B. Authorization for both cash and stock dividends
C. Market value used to charge retained earnings to account for a 2-for-1
stock split
D. Gain or loss from disposition of treasury shares

19. An audit of stockholders equity should include

A. Confirming shares outstanding with stockholders
B. Determining that dividend declarations comply with debt agreements
C. Reviewing minutes of board meetings to determine the number of shares
outstanding
D. Tracing individual dividend payments to the capital stock records

20. As one of the year-end audit procedures, the auditor instructed the clients
personnel to prepare a standard bank confirmation request for a bank account
that had been closed during the year. After the clients treasurer had signed the
request, it was mailed by the assistant treasurer. What is the major flaw in this
procedure?
A. Sending the request was meaningless because the account was closed
before the year ends.
B. The confirmation request was signed by the treasurer
C. The CPA did not signed the confirmation request before it was mailed
D. The request was mailed by the assistant treasurer

21. In order to efficiently establish the correctness of the Accounts Payable cutoff,
an auditor would be most likely to
A. Compare cutoff reports with purchase orders
B. Compare vendors invoices with vendors statements
C. Coordinate cutoff tests with physical inventory observation
D. Coordinate mailing of confirmations with cutoff tests

22. Which statement is correct regarding assurance engagements?

A. All engagements performed by professional accountants are assurance
engagements
B. All engagements undertaken by an auditor that is similar to an agreed-
upon procedures engagement does not result in the expression of a
conclusion that provides a level of assurance
C. The objective of an assurance engagement is for a professional accountant
to evaluate or measure a subject matter that is the responsibility of another
party against identifiable suitable criteria, and to express a conclusion that
provides the intended user with a level of assurance about that subject
matter
D. 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 and conclusion

23. Analytical review procedures are

A. Analytical tests of financial information made by a computer.
B. Substantive tests of financial information made by a study and comparison
of relationship among data.
C. Diagnostic test of financial information, which may not be, classified as
evidential matter.
D. Statistical test of financial information designed to identify areas requiring
intensive investigation.
24. The auditors opinion
A. Certifies the correctness of the financial statements
B. Guarantees the credibility of the financial statements
C. Is an assurance as to the future viability of the entity
D. Is not an assurance as to the efficiency with which management has
conducted the affairs of the entity

25. The following statements relate to RA 9298. Which statement is true?

A. After 3 years, subject to certain conditions, the Board of Accountancy may
order the reinstatement of a CPA whose certificate of registration has been
revoked
B. A person shall be considered to be in the professional practice of
accounting if, as an officer in private enterprise, he makes decisions
requiring professional accounting knowledge
C. Insanity is not a ground for proceeding against a CPA
D. The PRC has the authority to remove any member of the Board of
Accountancy for negligence, incompetence, or any other just cause

26. Are the following CPAs required to comply with the requirements on continuing
professional education?
CPAs in Public CPAs in Commerce CPAs in Education/ CPAs in
Accountancy & Industry Academe Government
A. Yes No Yes No
B. Yes Yes Yes No
C. Yes Yes No No
D. Yes Yes Yes Yes

27. How many CPE credit units must be accumulated by a registered accounting
professional within the three-year period?
A. 15
B. 45
C. 60
D. 90

28. Statement 1 A CPA in public accounting shall not pay or offer to pay a
commission to obtain a client, or shall he accept or agree to accept a commission
for a referral to a client or products or services of others.
Statement 2 A CPA may practice public accounting, whether as an owner or
employee, only in the form of proprietorship or partnership.
Statement 3 A partner surviving the death or withdrawal of all of other partners
may continue to practice under the partnership name for 5 years after becoming a
sole practitioner.

A. 1st statement is true, 2nd is false.

B. 1st statement is false, 2nd is true.
C. 1st statement is true, 3rd is false.
D. All statements are true.

29. What provides the highest level of assurance?

A. Audit
B. Agreed-upon procedures
C. Review
D. It depends on the nature of the engagement
30. When hiring a new staff member, what should the firm consider to comply with
quality control standards?
A. The person should have a broad range of interests to ensure that they
become well-rounded employees
B. The person should have adequate qualifications
C. The person should have proven skills in working within a team
environment
D. The person should have high morals to ensure that they will comply with
all ethical standards

31. An independent audit provides a number of benefits to the company because it

A. Assures the readers of financial statements that all fraud has been detected
B. Confirms the accuracy of managements financial representations
C. Guarantees that financial information is true and fair
D. Lends credibility to the financial statements

32. What is the meaning of the principle that requires the auditor to be independent?
A. The auditors must be without bias with respect to the client under audit
B. The auditor must adopt a critical attitude during the audit
C. The auditors responsibility is to third parties
D. The auditors may have a direct ownership interest in their clients business
if it is not material

33. Which of the following is a prime objective of Auditing Standards?

A. To provide guidance on all procedural matters to be followed during an
audit
B. To give assurance to auditors that they are performing the audit
appropriately so they will not subject to litigation
C. To ensure that the auditors are fulfilling their duties required by law
D. To detail mandatory procedures and principles with which the auditors
must comply

34. Which of the following best describes why the accounting profession issued a
Code of Professional Conduct and established means for ensuring its observance?
A. A requirement for a profession is the establishment of ethical standards that
stress primarily a responsibility to clients and colleagues
B. A distinguishing mark of a profession is its acceptance of responsibility to
the public
C. An essential means of self-protection for a profession is the establishment
of ethical standards
D. The government requires that all professions established a code of ethics

35. Which of the following is most likely to be ethically unacceptable?

A. Sending a brochure to all managing directors of the top 50 firms in your
local region advertising your services
B. Earning large commission for recommending life insurance services to a
client
C. Receiving a bonus for performing the annual audit of a client within a
prescribed time period
D. Holding clients monies in trust for extended periods of time

36. What does a signed audit report mean with respect to the possibility of fraud
within a company?
A. There is reasonable expectation that material irregularities due to fraud
have been detected
B. It is unlikely that immaterial irregularities have been detected, however,
all material irregularities should have been detected
 C. An audit is not designed to detect fraud, therefore, an audit report gives no
assurance as to whether fraud did or did not occur during the year
D. All frauds should have been detected

37. In which of the following situations is it least likely that the auditors would have
been negligent in failing to detect a material misstatement of stocks?
A. The auditors relied on a certificate provided by an independent expert
B. The audit program is drawn up by an experienced auditor and was fully
signed by the junior staff member assigned to audit the stocks
C. The senior partner called for further investigation of discrepancies after
receiving personal assurance from the chairman of the company that
stocks were properly valued
D. As in previous years, the auditor relied on the investigation of internal
audit rather than increase audit costs by duplicating the audit work

38. In which of the following situations would failure to detect a fraud constitute
grounds for claim of negligence?
A. The fraud was perpetrated by a senior management override of internal
controls which had been relied upon in reducing the extent of detailed
testing
B. The auditors reported discrepancies to local management but did not
investigate further as the likely impact on the accounts was not material
C. The auditors accepted local management representations as to
discrepancies as the potential impact of the fraud was not material to the
accounts as a whole
D. The auditors relied on sample evidence and thus failed to detect the
fraudulent transactions

39. As a consequence of his failure to adhere to auditing standards in the course of

examination of an audit client, the auditor did not detect the embezzlement of a
material amount of funds by the companys controller. To what extent would the
auditor be liable to the client for losses attributable to the theft?
A. He would have no liability because of privity of contract is lacking.
B. He would have no liability since the ordinary examination cannot be relied
upon to detect defalcation.
C. He would be liable if it could be proven that he was grossly negligent.
D. He would be liable for losses attributable to his negligence.

40. In which of the following situations might a claim arise under privity of contract?
A. A bank makes a loan to a company on the strength of a report
commissioned by the bank
B. A bank makes a loan to a company on the strength of a report
commissioned by the company for that specific purpose
C. The holder of 100% of the shares increases investment in the company on
the strength of the audited accounts
D. The engagement letter calls for the preparation of accounts of a
partnership without an audit, but one of the partner tells the public
accountant that another partner is suspected of fiddling expenses

41. Which of the following can be controlled by the auditor?

A. Inherent risk
B. Detection risk
C. Control risk
D. Both detection and control risk
42. Inherent risk would be considered to be high when
A. The companys profit for the year is the same as last year
B. The chief accountant has been with the company for 15 years
C. The newly appointed finance director was previously the marketing
manager
D. The company has decided to set-up an internal audit department.

43. Which of the following statements best describes the audit approach to
materiality?
A. Materiality is a matter of professional judgment
B. Materiality is only relevant when planning the audit
C. Materiality relates to the relative size of items within the financial
statements
D. Materiality is determine by reference to professional standards

44. Which of the following audit procedures is primarily intended to provide evidence
as to completeness?
A. Adding the debtors aged trial balance
B. Searching for unmatched goods received with notes
C. Confirming debtors balances with customers
D. Reviewing the outstanding check listings

45. In verifying the valuation of work completed, by a construction company, on a

long-term building contract, which source of evidence would you consider as
most reliable?
A. An independent architect called in to supply a valuation but who has not
otherwise been involved with the contract
B. An architect employed by the other party to the contract who has been
involved throughout n liaising with the company
C. An architect employed by the company who has direct responsibility for
building work on the contract
D. An independent but unqualified building surveyor

46. Engagement letters are widely used in practice for professional engagements of
all types. The primary purpose of the audit engagement letter is to
A. Remind management that the primary responsibility for the f/s rests with
management
B. Satisfy the requirements of the auditors liability insurance policy
C. Provide a starting point for the auditors preparation of the audit program
D. Provide a written record of the agreement with the client as to the services
to be provided

47. In the tour of the clients operations, the auditor noted two machines were not
operating in the clients factory. This meant that production was 25% lower than
normal. The factory manager informed the auditor that this was because the
machines were being serviced. However, the auditor saw no evidence of this.
How would this affect the audit plan?
A. It would have no effect. The factory managers explanation should be
accepted
B. It would increase the amount of the audit work on plant and machinery
C. It would be necessary to perform a more thorough review of sales for the
year and the sales forecasts
D. It would be necessary to perform more work to check for obsolescence
48. The auditors permanent working paper file should not normally include
A. Copies of the memorandum of association
B. Extracts from the clients bank statements
C. Details of mortgages
D. Past years financial statements

49. The primary objective of obtaining an understanding of the information system is

to provide the auditor with
A. Audit evidence to use in forming an overall opinion on the company
B. Enough understanding to design procedures to gather sufficient audit
evidence
C. Enough evidence to express an audit opinion
D. Enough understanding to express an opinion on the adequacy of the
entitys internal controls

50. Which of the following would not be relevant in obtaining an understanding of

the control environment?
A. The existence of an internal audit department
B. A need to demonstrate compliance with the requirements of a regulatory
agency
C. The existence of a sound budgetary control system
D. Adoption of accounting policies in conformity with accounting standards

51. In a study of the system of internal control, the completion of a questionnaire is

most closely associated with which of the following?
A. Separation of duties.
B. Review of the system.
C. Flowchart accuracy.
D. Tests of compliance.

52. Where the preliminary assessment of control risk is low for any particular audit
objective
A. The auditor must perform tests of controls in order to confirm that controls
are operating effectively
B. The auditor may proceed directly to performing a reduced level of
substantive testing
C. The auditor may consider performing tests of controls to confirm the
preliminary assessment if it would result in a reduction of the extent of the
audit effort
D. The auditor may reduce the extent of tests of controls otherwise necessary
in confirming the assessment of control risk

53. The maximum reliance an auditor may place on control procedures in reducing
the extent of substantive procedures is determined by
A. The results of tests of controls over operating effectiveness
B. Their design effectiveness in providing assurance the errors will be
prevented or detected on a timely basis
C. Their design effectiveness subject to sufficient evidence from tests of
controls that are operating effectively
D. The reduction in audit effort that could be achieved through reliance on
controls
54. What would most effectively describe the risk of incorrect rejection in terms of
substantive audit testing?
A. The auditor has ascertained that the balance is materially correct when in
actual fact it is not
B. The auditor has rejected an item for his or her sample and later found the
item was materially incorrect
C. The auditor concludes that the balance is materially misstated when in
actual fact it is not
D. The auditor decides to perform a predominantly compliance-based audit
due to an evaluation that the controls were effective within the company.
Midway through the audit, the auditor realizes the controls are not good,
and decides to expand substantive testing

55. The auditor is more likely to use analytical review as a substantive test when
A. Planned detection risk is high
B. Inherent risk is assessed as high
C. Control risk is assessed as low
D. Planned audit risk is high

56. Statement 1 In an entity with few, but large accounts receivable, the accounts
individually are more important and the possibility of material errors is greater
than in another entity that has greater number of small accounts aggregating the
same total.
Statement 2 In industrial and merchandising enterprises, inventories are usually
of great importance to both financial position and results of operations and
accordingly may require relatively more attention by an auditor than would
inventories of a public utility company.

A. Both statements are true.

B. Both statements are false.
C. Statement 1 is true, statement 2 is false.
D. Statement 1 is false, statement 2 is true.

57. Which of the following controls would most likely ensure that all deliveries are
invoiced?
A. The invoicing department supervisor matches pre-numbered shipping
documents with entries in the sales journal
B. The accounting department supervisor controls the mailing of monthly
statements to customers, and investigates any differences reported by
customers
C. Customers are required to acknowledge receipt of the goods by signing a
copy of the delivery note
D. All orders are required to be approved by the credit controller before the
goods are delivered

58. For which of the following reasons mish inherent risk over the occurrence of sales
transactions be assessed as high?
A. There is large volume of such transactions during the year
B. Sales department staff earn a bonus if hey achieve annual sales targets
C. Cash from sales transactions is easily misappropriated
D. There are poor controls over the year-end cut-off sales transactions

59. Which of the following would give the most assurance concerning the existence
of debtors?
A. Tracing amounts in the subsidiary ledger to details on shipping documents
B. Comparing debtors turnover ratios with industry statistics for
reasonableness
 C. Sending a debtors confirmation letter
D. Ensuring the sales subsidiary ledger has been correctly added

60. On receipt of suppliers invoices the purchase clerk should

A. Prepare a check in payment of an invoice
B. Match the invoice with goods received note and purchase order
C. Send it to the purchasing officer for approval
D. Ignore it as payments are based on statement amount

61. The principal reason for the auditor to examine suppliers statements at balance
sheet date is to obtain evidence that
A. The supplier exists
B. Recorded purchases actually occurred
C. There are no unrecorded liabilities
D. Payment transactions were properly made

62. Which of the following procedures would not be appropriate for an auditor in
discharging his or her responsibilities concerning the existence of the entitys
stocks?
A. Obtaining written representation from the entity as to the existence,
quality and value of the stocks
B. Carrying-out stock-taking procedures at an interim date
C. Supervising the annual stock-take
D. Confirming the goods in the hands of public warehouses

63. What audit procedures would be most likely detect the incorrect capitalization of
an expense to fixed assets?
A. Checking a sample of repairs and maintenance expenses to supporting
documents
B. Selecting a sample of additions to fixed assets, and ensuring that they have
adequate supporting documentation
C. Discussing the capitalization policy with the manager
D. Selecting a sample of large assets, and sighting them

64. When counting cash on hand, the auditor should

A. Obtain a receipt from the custodian as to its return
B. Have two audit staff present to minimize the risk of its being stolen
C. Note the details of cash and checks and other items making up the balance
D. Perform the count on the same date as the receivables confirmation to
ensure a reliable cut-off

65. Which of the following is least likely to require special attention when auditing
consolidated financial statements?
A. Subsidiaries audited by other auditors
B. Fair values of assets of subsidiaries acquired during the year
C. 100% owned subsidiaries
D. Subsidiaries located and operating in foreign countries

66. In the auditors completion of the audit, which of the following is not a
subsequent event procedure?
A. Read available minutes of meetings of directors
B. Make inquiries with respect to the preciously audited f/s to establish
whether information has become available that might affect that report
C. Read available interim financial statements
D. Discuss with officers the current status of items in the f/s that were
accounted for on the basis of inconclusive data
67. Which of the following is ordinarily included among the written management
representations obtained by the auditors?
A. Sufficient audit evidence has been made available to permit the issue of an
unqualified opinion
B. All books of accounts supporting documentation have been made
available
C. Management acknowledges that there are no material weaknesses in
internal control
D. Management acknowledges responsibility for illegal actions committed by
employees

68. The Statement of Auditing Standards promulgated was issued by the

A. Financial Reporting Standard Council
B. Board of Accountancy
C. Auditing Standard & Practice Council
D. Professional Regulation Commission

69. Statement 1 The objective of the ordinary examination of financial statements

by the auditor is the expression of an opinion on the fairness of such financial
statements.
Statement 2 - The auditors report is the medium through which the auditor
expresses his opinion, or if circumstances require, disclaims an opinion.

A. Both statements are true.

B. Both statements are false.
C. Statement 1 is true, statement 2 is false.
D. Statement 1 is false, statement 2 is true.

70. An auditor faces a risk that the examination will not detect material errors that
occur in the accounting process. To minimize this risk, the auditor primarily relies
on
A. Compliance tests
B. Internal control
C. Statistical analysis
D. Substantive test

*** END OF EXAMINATION, GOOD LUCK ***

 ANSWER KEY

1 B 11 B 21 B 31 D 41 B 51 B 61 C
2 B 12 A 22 C 32 A 42 C 52 C 62 C
3 D 13 C 23 B 33 D 43 A 53 C 63 B
4 B 14 D 24 D 34 B 44 B 54 C 64 C
5 C 15 A 25 B 35 C 45 A 55 A 65 C
6 D 16 C 26 D 36 A 46 D 56 A 66 B
7 B 17 B 27 C 37 A 47 D 57 A 67 B
8 C 18 B 28 C 38 C 48 B 58 B 68 C
9 B 19 A 29 A 39 D 49 B 59 C 69 A
10 C 20 D 30 B 40 A 50 D 60 B 70 D