The series of tasks and records of an entity by which transactions are processed as a means a. Corresponding figures c.

Supplementary report
of maintaining financial records. b. Comparative financial statements d. Notes of financial statements
a. Computer information system c. Accounting system
b. Internal control system d. Control environment The applications of auditing procedures using the computer as an audit tool refer to
The measure of the quality of audit evidence and its relevance to a particular assertion and a. Integrated test facility c. Auditing through the computer
its reliability. b. Data-based management system d. Computer assisted audit techniques
a. Sufficiency c. Significance
b. Appropriateness d. Assurance A collection of files that is shared and used by a number of different users.
a. Database c. Master file
It serves as a set of instructions to assistants involved in the audit and as a means to control b. Information file d. Transaction file
the proper execution of the work.
a. Audit program c. Engagement letter A report, separate from the financial statements, in which an entity provides third parties with
b. Overall audit plan d. Internal control questionnaire 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
Detection risk is between its business processes and environmental risk, and quantitative information on its
a. The risk that the auditor gives an inappropriate audit opinion when the financial environmental performance.
statements are materially misstated. a. Environmental performance report c. Environmental risk
b. The risk that a misstatement, that could occur in an account balance or class of b. Annual report d. Special purpose audit report
transactions and that could be material individually or when aggregated with
misstatements in other balances or classes, will not be prevented or detected and Comprises officers and others who also perform senior managerial functions.
corrected on a timely basis by the accounting and internal control systems. a. Management c. Audit committee
c. The risk that an auditor's substantive procedures will not detect a misstatement that exists b. Governance d. Board of directors
in an account balance or class of transactions that could be material, individually or when
aggregated with misstatements in other balances or classes. It exists when other information contradicts information contained in the audited financial
d. The susceptibility of an account balance or class of transactions to misstatement that statements.
could be material, individually or when aggregated with misstatements in other balances a. Material inconsistency c. Material weaknesses
of classes, assuming that there were no related internal controls. b. Material misstatement of fact d. Misstatement

Tolerable error means The policies and procedures adopted by a firm to provide reasonable assurance that all
a. An error that arises from an isolated event that has not recurred other than on specifically audits done by the firm are being carried out in accordance with the Objective and General
identifiable occasions and is therefore not representative of errors in the population. Principles Governing an Audit of Financial Statements.
b. An error that the auditor expects to be present in the population. a. Internal controls c. Peer review
c. The maximum error in a population that the auditor is willing to accept. b. Quality controls d. General controls
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. 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
The current periods auditor who did not audit the prior periods financial statements is called b. Related services d. Centralized operations
a. Predecessor auditor. c. Incoming auditor.
b. Other auditor. d. Principal auditor Refers to the audit procedures deemed necessary in the circumstances to achieve the
objective of the audit.
Principal auditor is a. Scope of an audit c. Audit program
a. The auditor who audited and reported on the prior period's financial statements and b. Scope of a review d. Scope limitation
continues as the auditor for the current period.
b. A current period's auditor who did not audit the prior period's financial statements. It relates to materiality of the financial statement assertions affected by the computer
c. The auditor who was previously the auditor of an entity and who has been replaced by an processing.
incoming auditor. a. Threshold c. Complexity
d. The auditor with responsibility for reporting on the financial statements of an entity when b. Relevance d. Significance
those financial statements include financial information of one or more components
audited by another auditor. A report issued in connection with the independent audit of financial information other than an
auditor's report on financial statements.
They are not presented as complete financial statements capable of standing alone, but are a. Special purpose auditor's reportc. Annual report
an integral part of the current period. b. Compilation reportd. Modified auditors report

Substantive procedures are tests performed to obtain audit evidence to detect material
misstatements in the financial statements. These include
a. Test of details of transactionsc. Substantive analytical procedures
b. Test of details of balancesd. All of the above.
Involves tracing a few transactions through the accounting system.
a. Test of controls c. Analytical procedures
b. Walk-through testd. Substantive procedures
Overview of auditing (Related PSAs : PSA 100, 120, 200 and 610)
Assurance services are best described as
a. Services designed for the improvement of operations, resulting in better outcomes.
b. Independent professional services that improve the quality of information, or its context,
for decision makers.
c. The assembly of financial statements based on assumptions of a reasonable party.
d. Services designed to express an opinion on historical financial statements based on the
results of an audit.
Assurance services least likely involve
a. Improving the quality of information for decision purposes.
b. Improving the quality of the decision model used.
c. Improving the relevance of information.
d. Implementing a system that improves the processing of information.
Which of the following statements is (are) true regarding the provision of assurance services?
a. The third party who receives the assurance generally pays for the assurance received.
b. Assurance services always involve a report by one person to a third party on which an
independent organization provides assurance.
c. Assurance services can be provided either on information or processes.
d. All of the above.
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.
Which of the following services would be most likely to be structured as an attest
engagement?
a. Advocating a clients position in tax matter.
b. A consulting engagement to develop a new data base system for the revenue cycle.
c. An engagement to issue a report addressing an entitys compliance with requirements of
specified laws.
d. The compilation of a clients forecast information.
Which of the following is broadest in scope?
a. Audits of financial statements. c. Internal control audit.
b. Assurance services. d. Attestation services.
Independent auditing can be described as
a. A branch of accounting.
b. A professional activity that measures and communicates financial and business data.
c. A discipline which attests to the results of accounting and other functional operations and
data.
d. A regulating function that prevents the issuance of erroneous or improper financial
information.
A financial statement audit is designed to
a. Provide assurance on internal control and to identify reportable conditions.
b. Detect error or fraud in the financial statements, regardless of whether or not the error or
fraud is material.
c. Obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether caused by error or fraud.
d. Obtain absolute assurance on the financial statements and express an opinion on the
financial statements.
Which of the following best describes why an independent auditor is asked to express an
opinion on the fair presentation of financial statements?
a. It is difficult to prepare financial statements that fairly present a companys financial
position and changes in financial position and operations without the expertise of an
independent auditor.
b. It is managements responsibility to make available independent aid in the preparation of
the financial information shown in the financial statements.
c. The opinion of an independent party is needed because a company may not be objective
with respect to its own financial statements.
d. It is a customary courtesy that shareholders of a company receive an independent report
on managements status in managing the affairs of the business.
An audit of the financial statements of Camden Corporation is being conducted by an
external auditor. The external auditor is expected to
a. Express an opinion as to the fairness of Camden's financial statements.
b. Express an opinion as to the attractiveness of Camden for investment purposes.
c. Certify to the correctness of Camden's financial statements.
d. Critique the wisdom and legality of Camden's business decisions.
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.
A technique for regularly and systematically appraising a unit of function and its effectiveness
against corporate and industry standards with the objective of assuring management that its
aims are being carried out and/or identifying conditions capable of being improved
a. Financial auditing. c. Operations auditing.
b. Compliance tests. d. Management auditing.
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.
Which of the following types of audits are most similar?
a. Operational audits and compliance audits.
b. Independent financial statement audits and operational audits.
c. Compliance audits and independent financial statement audits. objective of an audit.
d. Internal audits and independent financial statement audits.

To make the internal audit department independent, he should report directly to the Williams & Co., a large international CPA firm, is to have an external peer review. The peer
a. Board of Directors. c. Stockholders. review will most likely be performed by
b. Audit committee. d. Controller. a. Employees and partners of Williams & Co. who are not associated with the particular
audits being reviewed.
An independent audit b. Audit review staff of the Securities and Exchange Commission.
a. Supports an internal audit. c. Duplicates an internal audit. c. Audit review staff of the American Institute of Certified Public Accountants.
b. Negates an internal audit. d. Complements an internal audit. d. Employees and partners of another CPA firm.
The members of the Commission on Audit should
a. Be a member of the bidding committee of the agency. One of the advantages of the fixed fee (or flat sum) basis of billing a client is that the
b. Hold office for nine years without reappointment. a. CPAs compensation is more directly related to the quality of his service rather than to
c. Be a commissioner and an associate commissioner. time spent.
d. Be a CPA or member of the Bar with ten years experience. b. CPA is assured of avoiding a loss on the engagement even if he underestimates his
costs.
Besides expressing an opinion on the fairness of financial statement presentation, a c. Fixed fee method is particularly effective for measuring charges for routine engagements.
government auditor normally includes audit of effectiveness, compliance as well as d. Client pays for exactly what he gets in terms of work performed.
a. Internal control. c. Mathematical accuracy.
b. Economy. d. Risk evaluation. Philippine Accountancy Act of 2004 (RA 9298) and its IRR
Which of the following is not one of the function of the Board of Accountancy as specifically
Governmental effectiveness (program) auditing seeks to determine whether the desired provided under RA 9298?
results are being achieved and objectives are being met. The first step in the performance of a. To determine and prescribe minimum requirements leading to the admission of
such an audit would be: candidates to the CPA examination.
a. Evaluate the system used to measure results. b. To investigate violations of the Accountancy Law and the rules and regulations
b. Determine the sampling frame to use in studying the system. promulgated thereunder.
c. Collect and analyze quantifiable data. c. To perform visitorial powers or review professional work of accounting practitioners in a
d. Identify the legislative intent of the program being audited. general or random basis.
d. After due process, to suspend, revoke, or reissue certificates of registration for causes
Professional Accounting Practice (Related PSA : Preface to PSA and Related Services) provided for by law by the rules and regulations promulgated therefor.
A pervasive characteristic of a CPAs role in a Management Consulting Services engagement
is that of being a(n) No person shall serve the Professional Regulatory Board of Accountancy for more than
a. Objective advisor. c. Computer specialist. a. 3 yearsb. 6 yearsc. 9 years d. 12 years
b. Independent practitioner. d. Confidential reviewer.
The Accountancy Law provided that a CPA certificate may be suspended or revoked on
Which one of the following is not a logical function of a CPA in public accounting practice? grounds except
a. Attest function. c. Tax practice. a. Immoral or dishonorable conduct.
b. Supervision of internal audit staff. d. Management consulting services. b. Gross negligence or incompetence in the practice of profession.
c. Refusal to accept an audit engagement with a government corporation.
The quality of performance of an auditor is measured by the statements emanating from the d. Conduct discreditable to the accounting profession.
a. Accounting Standards Council
b. Quality Control Standards Under the IRR of RA 9298, if a partner in a two-member partnership dies, the surviving
c. Auditing Standards and Practices Council partner may continue to practice as an individual under the existing firm title which includes
d. Interpretations of Accountants in Practice the deceased partners name
a. For a period of time not to exceed five years.
The Philippine Standards on Auditing issued by ASPC b. For a period of time not to exceed two years.
a. Are applicable only when an independent audit involving an expression of an opinion on c. Indefinitely.
financial statements is carried out. d. Until the partnership payout to the deceased partners estate is terminated.
b. Are the only authoritative source of auditing standards for members of the accountancy
profession in the Philippines. Which of the following is required for a partnership for public accountancy practice?
c. Are general guidelines to help auditors. a. At least one of the partners must be a CPA.
d. Require that in no circumstances would an auditor may judge it necessary to depart from b. All partners must be PICPA members.
a PSA, even though such a departure may result to more effective achievement of the c. All partners must be CPAs.
d. Firm name must contain names of partners only.
Code of Ethics
Which of the following statements best explains why the CPA profession has found it essential
to promulgate ethical standards and to establish means for ensuring their observance?
a. Vigorous enforcement of an established code of ethics is the best way to prevent
unscrupulous acts.
b. Ethical standards that emphasize excellence in performance over material rewards establish
a reputation for competence and character.
c. A distinguishing mark of a profession is its acceptance of responsibility to the public.
d. A requirement for a profession is to establish ethical standards that stress primarily a
responsibility to clients and colleagues.
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.
During the course of an audit engagement, the CPA needed additional studies and
consultation with experts. This additional study and consultation is deemed to be
a. An unusual practice which should have voided the audit engagement.
b. Lack of competence on the part of the CPA.
c. An appropriate part of the professional conduct of the audit engagement.
d. Undertaken as a responsibility of management.
After beginning an audit of a new client, Larkin, CPA, discovers that the professional
competence necessary for the engagement 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
competent 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.
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 professionals 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.
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.
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 Smiths 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 firm of CPAs consents, Smith may provide the bank with information
concerning Wald.
d. The only way the bank can obtain information concerning Smiths audit is to obtain it by
subpoena.
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.
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.
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.
According to the profession's ethical standards, an auditor would be considered independent in
which of the following instances?
a. The auditor's checking account, which is fully insured by a PDIC, is held at a client financial
institution.
b. The auditor is also an attorney who advises the client as its general counsel.
c. An employee of the auditor donates service as treasurer of a charitable organization that is a
client.
d. The client owes the auditor fees for two consecutive annual audits.
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 personal net worth. Would the independence of the CPA be considered to be
impaired with respect to the client?
a. Yes, because the stock would be considered a direct financial interest and consequently,
materiality is not a factor.
b. Yes, because the stock would be considered an indirect financial interest that is material to
the CPA's child.
c. No, because the CPA would not be considered to have a direct financial interest in the client.
d. No, because the CPA would not be considered to have a material indirect financial interest in
the client.
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 for 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 auditor or
to the financial statements of the client arising out of disputes as to billings for management
advisory services.
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 billings for tax services.
Which of the following is not prohibited by the Code of Professional Ethics for CPAs?
a. Advertising and solicitation of clients.
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.
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.
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 14344. 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.
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.
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 AICPA rules of conduct?
a. Reprints of newspaper articles which are laudatory with respect to the firms 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.
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.
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.
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.
Which of the following is required if the professional accountant uses experts who are not
professional accountants?
a. The ultimate responsibility for the professional service is assumed by the expert who is
not a professional accountant.
b. The professional accountant is discouraged to engage the services of experts who are
not a professional accountant.
c. The professional accountant must take steps to see that such experts are aware of ethical
requirements.
d. Experts who are not professional accountants need not be informed of ethical
requirements because they are not members of the Accountancy profession.
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
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.
The lead engagement partner should be rotated after a pre-defined period, normally no more
than d. All of the above statements are false.
a. 2 years b. 3 years c. 5 years d. 7 years
Auditing standards require that auditors be aware of relevant factors relating to fraudulent
Professional Responsibilities (Related PSAs : PSA 240rev, 250 and 260) reporting. Which of the following statements is false concerning fraudulent reporting?
An auditor should recognize that the application of auditing procedures may produce a. Fraud frequently involves a pressure or an incentive to commit fraud and a perceived
evidential matter indicating the possibility of errors and irregularities and therefore should opportunity to do so.
a. Design audit tests to detect unrecorded transactions. b. Two types of fraud relevant to the auditor include material misstatements arising from
b. Extend the work to audit most recorded transactions and records of an entity. fraudulent financial reporting and material misstatements arising from misappropriation of
c. Plan and perform the engagement with an attitude of professional skepticism. assets.
d. Not depend on internal accounting control features that are designed to prevent or detect c. Fraud involves actions of management but excludes the actions of employees or third
errors or irregularities. parties.
d. An audit rarely involves the authentication of documentation; thus, fraud may go
Audits of financial statements are designed to obtain assurance of detecting material undetected by the auditor.
misstatements due to
a b c d Which of the following is an example of fraudulent financial reporting?
Errors Yes Yes Yes No a. Company management changes inventory count tags and overstates ending inventory,
Fraudulent financial reporting Yes Yes No Yes while understating cost of goods sold.
Misappropriation of assets Yes No Yes No b. The treasurer diverts customer payments to his personal due, concealing his actions by
debiting an expense account, thus overstating expenses.
Which of the following factors is most important concerning an auditor's responsibility to detect c. An employee steals inventory, and the shrinkage is recorded in cost of goods sold.
errors and irregularities? d. An employee steals small tools from the company and neglects to return them; the cost is
a. The susceptibility of the accounting records to intentional manipulations, alterations, and the reported as a miscellaneous operating expense.
misapplication of accounting principles.
b. The probability that unreasonable accounting estimates result from unintentional bias or Lapping is
intentional attempts to misstate the financial statements. a. Making the financial statements indicate a more favorable position by giving effect to
c. The possibility that management fraud, defalcations, and the misappropriation of assets may transactions is a period other than that in which these actually occurred.
indicate the existence of illegal acts. b. Done to inflate the cash position or cover the theft of cash by depositing at the end of the
d. The risk that mistakes, falsifications, and omissions may cause the financial statements to accounting period a check drawing on one bank account in another bank account without
contain material misstatements. making the necessary deduction in the balance of the first bank.
c. An irregularity that conceals cash shortages by a delay in recording cash collections,
In connection with the examination of financial statements, an independent auditor could be retaining a customer's payment on credit sales and covering up the shortage with
responsible for failure to detect a material fraud subsequent cash receipts.
a. Statistical sampling techniques were not used in the audit engagement. d. A kind of fraud committed by making entry of fictitious payments or failure to enter receipts.
b. The auditor planned the work in a hasty and inefficient manner.
c. Auditors performing important parts of the work failed to discover a close relationship In general, material fraud perpetrated by which of the following are most difficult to detect?
between the treasurer and the cashier. a. Cashier. c. Internal auditor.
d. The fraud was perpetuated by one client employee who circumvented the existing internal b. Keypunch operator. d. Controller.
controls.
Certain management characteristics may heighten the auditor's concern about the risk of
An error in which an item is posted to the wrong personal account, or the incorrect calculation material misstatements. The characteristic that is least likely to cause concern is that
of an amount constituting an original entry is a(n) management
a. Error of omission. c. Error of principle. a. Operating and financing decisions are made by numerous individuals.
b. Error of commission. d. Compensating error. b. Commits to unduly aggressive forecasts.
c. Has an excessive interest in increasing the entity's stock price through use of unduly
The term error refers to unintentional misrepresentations of financial information. Examples aggressive accounting practices.
of errors are when: d. Is interested in inappropriate methods of minimizing earnings for tax purposes.
(1) Assets have been misappropriated.
(2) Transactions without substance have been recorded. Which of the following information discovered during an audit most likely would raise a
(3) Records and documents have been manipulated and falsified. question concerning possible illegal acts?
(4) The effects of transactions have been omitted from records or documents. a. Related party transactions, although properly disclosed, were pervasive during the year.
a. All of the above statements are true. b. The entity prepared several large checks payable to cash during the year.
b. Only statements (2) and (4) are true. c. Material internal control weaknesses previously reported to management were not
c. Only statements (1) and (3) are true. corrected.
d. The entity was a campaign contributor to several local political candidates during the year.
In a financial statement audit, the auditor should consider categories of fraud risk factors
relating to misstatements arising from (1) fraudulent financial reporting and (2)
misappropriation of assets. Which of the following is a category of risk factors that should be
considered in relation to misstatements arising from misappropriation of assets?
a. Industry conditions . c. Managements characteristics.
b. Operating characteristics. d. Controls.
The auditor is most likely to presume that a high risk of 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 each month.
fraud?
a. All risk factors considered should be documented and the response to each documented.
b. Those risk factors identified and the auditors response to them should be documented.
c. The major categories of risk factors must be identified, but the particular responses to risk
factors identified need not be documented.
d. No specific documentation is required.
When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain
an understanding of the nature of the act to
a. Evaluate the effect on the financial statements.
b. Determine the reliability of managements representation.

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 projection.
d. The rate of change in the entitys industry is slow.

Which of the following circumstances most likely would cause an auditor to consider whether
material misstatements exist in an entitys 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.

Which of the following circumstances most likely would cause an auditor to believe that
material misstatements may exist in an entitys financial statements?
a. Accounts receivable confirmation requests yield significantly fewer responses than
expected.
b. Audit trails 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 auditors fieldwork.
d. Management consults with other accountants about significant accounting matters.

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 any knowledge of fraud that has been perpetrated on or within
the entity.
c. Managements attitudes toward its employees.
d. Auditors are not required to make inquiries of management relating to fraud.

When fraud has been identified, CPA responsibility consists of

a. Report the matter to the police. c. He should have prevented it.
b. He is not at all responsible. d. Determination of its extent.

Which of the following is correct concerning the required documentation in the working c. Consider whether other similar acts may have occurred.
papers of the performance of the assessment of the risk of material misstatement due to d. Recommend remedial actions to the audit committee.
. c. Inquiry of third parties, such as the prospective client's bankers and attorneys, about
Which of the following statements concerning illegal acts by clients is correct?
a. An auditor's responsibility to detect illegal acts that have a direct and material effect on the
financial statements is the same as that for errors and irregularities.
b. An audit in accordance with GAAS normally includes audit procedures specifically designed
to detect illegal acts that have an indirect but material effect on the financial statements.
c. An auditor considers illegal acts from the perspective of the reliability of management's
representations rather than their relation to audit objectives derived form financial statement
assertions.
d. An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on
the financial statements.
The regular examination of financial statements is not primarily designed to disclose fraud
and other irregularities although their discovery may result. Normal audit procedures are
more likely to detect a fraud arising from
a. Forgeries on company checks.
b. Failure to record cash receipts for services rendered.
c. Theft of inventories.
d. Collusion on the part of several employees.
100. 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 of sales returns and allowances recorded after year-end.
Quality Controls (Related PSA : PSA 220)
101. Which of the following best describes what is meant by GAAS?
a. Acts to be performed by the auditor.
b. Measures of the quality of the auditor's performance.
c. Procedures to be used to gather evidence to support financial statements.
d. Audit objectives generally determined on audit engagements.
102. The least important evidence of a CPA firm's evaluation of its system of quality controls would
concern the CPA firm's policies and procedures with respect to
a. Employment (hiring).
b. Confidentiality of audit engagements.
c. Assigning personnel to audit engagements.
d. Determination of audit fees.
103. The primary purpose of establishing quality control policies and procedures for deciding
whether to accept a new client is to
a. Enable the CPA firm to attest to the reliability of the client.
b. Satisfy the CPA firms duty to the public concerning the acceptance of clients.
c. Minimize the likelihood of association with clients whose management lacks integrity.
d. Anticipate before performing any fieldwork whether an unqualified opinion can be
expressed.
104. 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. Consideration of whether sufficient competent evidential matter may be obtained to afford a
reasonable basis for an opinion.
information regarding the prospective client and its management.
d. Consideration of whether the internal control structure is sufficiently effective to permit a
reduction in the extent of required substantive tests.
105. In pursuing a CPA firms quality control objectives, a CPA firm may maintain records
indicating which partners or employees of the CPA firm were previously employed by the
CPA firms clients. Which quality control objective would this be most likely to satisfy?
a. Professional relationship. c. Independence.
b. Supervision. d. Advancement.
106. The audit work performed by each assistant should be reviewed to determine whether it was
adequately performed and to evaluate whether the
a. Auditors system of quality control has been maintained at a high level.
b. Results are consistent with the conclusions to be presented in the auditors report.
c. Audit procedures performed are approved in the professional standards.
d. Audit has been performed by persons having adequate technical training and proficiency
as auditors.
107. Which of the following is the best criterion for evaluating a staff auditors work performance?
a. Quantity of deficiency findings.
b. Ability to get along with clients.
c. Working papers appearance.
d. Fulfillment of requirements set forth in the audit programs.
108. The auditor with final responsibility for an engagement and one of the assistants have a
difference of opinion about the results of an auditing procedure. If the assistant believes it is
necessary to be disassociated from the matters resolution, the CPA firms procedures should
enable the assistant to
a. Refer the disagreement to the PICPAs Quality Review Committee.
b. Document the details of the disagreement with the conclusion reached.
c. Discuss the disagreement with the entitys management or its audit committee.
d. Report on the disagreement to an impartial peer monitoring team.AICPA 11/93
Pre-engagement (Related PSAs: PSA 210)
109. Which of the following factors most likely would cause an auditor not to accept a new audit
engagement?
a. An inadequate understanding of the entitys internal control.
b. The close proximity to the end of the entitys fiscal year.
c. Concluding that the entitys management probably lacks integrity.
d. An inability to perform preliminary analytical procedures before assessing control risk.
110. 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 management.
b. The degree of cooperation the previous auditor received from the clients lawyer.
c. An inquiry regarding disagreements with management as to auditing procedures.
d. The predecessor auditors understanding as to the reasons for the change of auditors.
111. Which of the following factors most likely would influence an auditors determination of the
auditability of an entitys financial statements?
a. The complexity of the accounting system.
b. The existence of related-party transactions.
c. The adequacy of the accounting records.
d. The operating effectiveness of control procedures.
112. In making a decision to accept or continue with a client, the auditor should consider:
A b c d
Its own independence Yes No Yes No
Its ability to service a client properly Yes Yes Yes No
The integrity of the clients management Yes Yes No Yes
113. Which of the following is least likely a source of information about a potential new audit 122. An auditor obtains knowledge about a new clients business and its industry to
client? a. Make constructive suggestions concerning improvements to the clients internal control.
a. The predecessor auditor. b. Develop an attitude of professional skepticism concerning managements financial
b. Management. statement assertions.
c. Industry journal. c. Evaluate whether the aggregation of known misstatements causes the financial
d. The new auditors permanent file. statements takes as a whole to be materially misstated.
114. Preliminary arrangements agreed to by the auditor and the client should be reduced to writing d. Understand the events and transactions that may have an effect on the clients financial
by the auditor. The best place to set forth these arrangements is in statements.
a. A memorandum to be placed in the permanent section of the auditing working papers. 123. A CPA may reduce the audit work on a first-time audit by reviewing the working papers of the
b. An engagement letter. predecessor auditor. The predecessor should permit the successor to review working papers
c. A client representation letter. relating to matters of continuing accounting significance such as those that relate to
d. A confirmation letter attached to the constructive services letter. a. Extent of reliance on the work of specialists.
115. When an auditor believes that an understanding with the client has not been established, he b. Fee arrangements and summaries of payments.
or she should ordinarily c. Analysis of contingencies.
a. Perform the audit with increased professional skepticism. d. Staff hours to complete the engagement.
b. Decline to accept or perform the audit. 124. Which of the following procedures would an auditor most likely perform in planning a financial
c. Assess control risk at the maximum level and perform a primarily substantive audit. statement audit?
d. Modify the scope of the audit to reflect an increased risk of material misstatements due to a. Reviewing investment transactions of he audit period to determine whether related parties
fraud. were credited.
116. Assuming a recurring audit, in which of the following situations would the auditor be unlikely to b. Performing analytical procedures to identify areas that may represent specific risks.
send a new engagement letter to the client? c. Reading the minutes of stockholder and director meetings to discover whether any
a. A recent change in partner and/or staff involved in the audit engagement. unusual transactions have occurred.
b. A change in the terms of engagement. d. Obtaining a written representation letter from the client to emphasize managements
c. A recent change of client management. responsibilities.
d. A significant change in the nature or size of the client's business. 125. Which of the following procedures would an auditor least likely perform in planning a financial
Audit planning (Related PSAs: PSA 300, 310, 320, 520 and 570) statement audit?
117. Adequate audit planning helps ensure that appropriate attention is devoted: a. Coordinating the assistance of entity personnel in data preparation.
a. b. c. d. b. Discussing matters that may affect the audit with firm personnel responsible for non-audit
To important areas of the audit Yes Yes Yes Yes services to the entity.
So that potential problems are promptly identified Yes Yes No No c. Selecting a sample of vendors invoices for comparison to receiving reports.
So that the work is completed expeditiously No Yes No Yes d. Reading the current years interim financial statements.
118. In planning an examination, the auditor would consider all of the following matters, except 126. In developing the overall audit plan for a new client, factor not to be considered is
a. Anticipated reliance on internal controls. a. The terms of the engagement and any statutory responsibilities.
b. Preliminary judgment about materiality levels for audit purposes. b. The client's business, including the structure of the organization and accounting system
c. Financial statement items likely to require adjustment. used.
d. The kind of opinion (unqualified, qualified, disclaimer, or adverse), likely to be given. c. The amount of estimated audit fee.
119. Which of the following situations would most likely require special audit planning by the d. The audit risk and procedures to be performed to achieve audit objectives.
auditor? 127. The element of the audit planning process most likely to be agreed upon with the client
a. Some items of factory and office equipment do not bear identification numbers. before implementation of the audit strategy is the determination of the (E)
b. Depreciation methods used on the clients tax return differ from those used on the books. a. Evidence to be gathered to provide a sufficient basis for the auditors opinion.
c. Assets costing less than P5,000 are expensed even though the expected life exceeds b. Procedures to be undertaken to discover litigation, claims and assessments.
one year. c. Pending legal matters to be included in the inquiry of the clients attorney.
d. Inventory is comprised of precious stones. d. Timing of inventory observation procedures to be performed.
120. This includes distributing assignments among staff assistants and reviewing the progress of 128. A basic tool used by the auditor to control the audit work and review the progress of the audit.
such assignments on a periodic basis. a. Audit programc. Engagement letter.
a. Supervision b. Staff training c. CPE d. Planning. b. Progress flowchartd. Time and Expense Summary
121. The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit 129. Those procedures specifically outlined in an audit program are primarily designed to
conference with the audit team primarily to a. Gather evidence.
a. Give guidance to the staff regarding both technical and personnel aspects of the audit. b. Detect errors or irregularities.
b. Discuss staff suggestions concerning the establishment and maintenance of time c. Test internal systems.
budgets. d. Protect the auditor in the event of litigation.
c. Establish the need for using the work of specialists and internal auditors. 130. An audit program provides proof that
d. Provide an opportunity to document staff disagreements regarding technical issues. a. Sufficient competent evidential matter was obtained.
 b. The work was adequately planned.
c. There was compliance with GAAS of reporting.
d. There was a proper study and evaluation of internal control.
131. Audit programs should be designed so that
a. Most of the required procedures can be performed as interim work.
b. Inherent risk is assessed at a sufficiently low level.
c. The auditor can make constructive suggestions to management.
d. The audit evidence gathered supports the auditors conclusions.
132. The audit program usually cannot be finalized until the
a. Consideration of the entitys 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.
133. In designing written audit programs, an auditor should establish specific audit objectives that
related primarily to the
a. Timing of audit procedures. c. Selected audit techniques.
b. Cost-benefit of gathering evidence. d. Financial statement assertions.
134. Which item would not be contained in an audit program?
a. Staff assigned to the audit.
b. List of specific tasks to be performed.
c. Documentation of system being reviewed.
d. Estimated time required to perform each task.
135. When planning an examination, an auditor should
a. Consider whether the extent of substantive tests may be reduced based on the results of the
internal control questionnaire.
b. Make preliminary judgments about materiality levels for audit purposes.
c. Conclude whether changes in compliance with prescribed control procedures justifies
reliance on them
d. Prepare a preliminary draft of the management representation letter.
136. The concept of materiality will be least important to the CPA in determining the
a. Scope of his audit of specific accounts.
b. Specific transactions that should be reviewed.
c. Effects of audit exceptions upon his opinion.
d. Effects of his direct financial interest in a client upon his independence.
137. In considering materiality for planning purposes, an auditor believes that misstatements
aggregating P100,000 would have a material effect on an entitys income statement, but the
misstatements would have to aggregate P200,000 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. P100,000 b. P200,000 c. P150,000 d. P300,000
138. 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.
139. Which of the following procedures would an auditor most likely include in the initial planning
of a financial statement audit?
a. Obtaining a written representation letter from the clients management.
b. Examining documents to detect illegal acts having a material effect on the financial
statements.
c. Consider whether the clients accounting estimates are reasonable in the circumstances.
d. Determining the extent of involvement of the clients internal auditors.
140. If the independent auditors decide that the work performed by the internal auditor may have a
bearing on their own procedures, they should consider the internal auditors
a. Competence and objectivity. c. Independence and review skills.
b. Efficiency and experience. d. Training and supervisory skills.
141. When assessing an internal auditors objectivity, an independent auditor should
a. Evaluate the adequacy of the internal auditors audit programs.
b. Inquire about the internal auditors educational background and professional certification.
c. Consider the organizational level to which the internal auditor reports.
d. Review the internal auditors working papers.
142. For which of the following judgments may an independent auditor share responsibility with an
entitys internal auditor who is assessed to be both competent and objective?
a. b. c. d.
Materiality of misstatements Yes No No Yes
Evaluation of accounting estimates No Yes No Yes
143. Which of the following is not a specialist upon whose work an auditor may rely?
a. Lawyer. b. Internal auditor. c. Actuary. d. Appraiser.
144. Which of the following statements is correct concerning an auditors use of the work of a
specialist?
a. The auditor need not obtain an understanding of the methods and assumptions used by
the specialist.
b. The auditor may not use the work of a specialist in matters material to the fair
presentation of the financial statements.
c. The reasonableness of the specialists assumptions and their applications are strictly the
auditors responsibility.
d. The work of a specialist who has a contractual relationship with the client may be
acceptable under certain circumstances.
145. When using the work of another auditor, the principal auditor should ordinarily perform the
following procedure
a. Obtain information regarding the professional competence of the other auditor in the
context of the specific assignment undertaken by the other auditor.
b. Advise the other auditor of the applicable independence requirements as regards both the
entity and the component and obtain representation as to his compliance with them.
c. Advise the other auditor of the applicable accounting, auditing and reporting requirements
and obtain representation as to compliance with them.
d. All of the above.
Risk Assessment and Response to Assessed Risks (Related PSAs: PSA 400, 315 and 330)
146. The audit risk against which the auditor and those who rely on his/her opinion require
reasonable protection is a combination of three separate risks at the account-balance or
class-of-transactions level. The first risk is inherent risk. The second risk is that material
misstatements will not be prevented or detected by internal control. The third risk is that
a. The auditor will reject a correct account balance as incorrect.
b. Material misstatements that occur will not be detected by the audit.
c. The auditor will apply an inappropriate audit procedure.
d. The auditor will apply an inappropriate measure of audit materiality.
147. Audit risk consists of inherent risk, control risk, and detection risk. Which of the following
statements is true?
a. Cash is more susceptible to theft than an inventory of coal because it has a greater
 inherent risk. a. Determine whether procedures and records concerning the safeguarding of assets are
b. The risk that material misstatement will not be prevented or detected on a timely basis by reliable.
internal control can be reduced to zero by effective controls. b. Ascertain whether the opportunities to allow any person to both perpetrate and conceal
c. Detection risk is a function of the efficiency of an auditing procedure. fraud are minimized.
d. The existing levels of inherent risk, control risk, and detection risk can be changed at the c. Modify the initial assessments of inherent risk and preliminary judgments about materiality
discretion of the auditor. levels.
148. Control risk should be assessed in terms of d. Determine the nature, timing and extent of substantive tests for financial statement
a. Specific controls. assertions.
b. Types of potential fraud. 157. Which of the following is not a component of internal control?
c. Financial statement assertions. a. Control risk. c. Information and communication.
d. Control environment factors. b. Monitoring. d. The control environment.
149. After obtaining a sufficient understanding of internal control, the auditor assesses 158. Which of the following factors are included in an entitys control environment?
a. The need to apply GAAS. A b c d
b. Detection risk to determine the acceptable level of inherent risk. Audit committee Yes Yes No Yes
c. Detection risk and inherent risk to determine the acceptable level of control risk. Integrity and ethical values Yes No Yes Yes
d. Control risk to determine the acceptable level of detection risk. Organizational structure No Yes Yes Yes
150. An auditor may decide to assess control risk at the maximum level for certain assertions 159. Basic to a proper control environment are the quality and integrity of personnel who must
because the auditor believes perform the prescribed procedures. Which is not a factor in providing for competent
a. Control policies and procedures are unlikely to pertain to the assertions. personnel?
b. The entitys control environment, accounting system, and control procedures are a. Segregation of duties. c. Training programs.
interrelated. b. Hiring practices. d. Performance evaluations.
c. Sufficient evidential matter to support the assertions is likely to be available. 160. Control activities constitute one of the five components of internal control. Control activities
d. More emphasis on tests of controls than substantive tests is warranted. do not encompass
151. When control risk is assessed at the maximum level for all financial statement assertions, an a. Performance reviews. c. Physical controls.
auditor should document the auditors b. Information processing. d. An internal audit function.
a.b.c.d. 161. Proper segregation of duties reduces the opportunities to allow persons to be in positions to
Understanding of the entitys internal control structure elements Yes YesNoYes both
Conclusion that control risk is at the maximum levelNo YesYesYes a. Journalize entries and prepare financial statements.
Basis for concluding that control risk is at the maximum levelNoNoYesYes b. Record cash receipts and cash disbursements.
152. When an auditor increases the assessed level of control risk because certain control activities c. Establish internal controls and authorize transactions.
were determined to be ineffective, the auditor would most likely increase the d. Perpetuate and conceal errors and irregularities.
a. Extent of tests of controls. c. Extent of tests of details. 162. Which of the following are compatible functions in a well-designed internal control structure.
b. Level of detection risk. d. Level of inherent risk. a. Preparing receiving reports, and also approving purchase orders.
153. The auditor faces a risk that the examination will not detect material errors which occur in the b. Approving vouchers for payment, and also have access to unused purchased orders.
accounting process. In regard to minimizing this risk, the auditor primarily relies on c. Mailing signed checks, and also preparing bank reconciliations.
a. Substantive tests. c. Internal control. d. Mailing signed checks, and also canceling supporting documents.
b. Compliance tests. d. Statistical analysis. 163. Internal control should follow certain basic principles to achieve its objectives. One of these
154. The auditor uses the assessed level of control risk (together with the assessed level of principles is the segregation of functions. Which one of the following examples does not
inherent risk) to determine the acceptable level of detection risk for financial statement violate the principle of segregation of functions?
assertions. As the acceptable level of detection risk decreases, the auditor may do one or a. The treasurer has the authority to sign checks but gives the signature block to the
more of the following except change the assistant treasurer to run the check-signing machine.
a. Nature of substantive tests to more effective procedures. b. The warehouse clerk, who has the custodial responsibility over inventory in the
b. Timing of substantive tests, such as performing them at year-end rather than at an interim warehouse, may authorize disposal of damaged goods.
date. c. The sales manager has the responsibility to approve credit and the authority to write off
c. Extent of substantive tests, such as using larger sample sizes. accounts.
d. Assurances provided by substantive tests to a lower level. d. The department time clerk is given the undistributed payroll checks to mail to absent
155. While performing an audit, Sebastian decides to restrict the risk of misstatement to 3%. What employees.
must the acceptable level of detection risk be if inherent risk is 25% and control risk is 40%? 164. If internal control is well designed, two tasks that should be performed by different persons
a. 0.3% b. 30% c. 12% d. 33.3% are
a. Approval of bad debt write-offs, and reconciliation of the accounts payable subsidiary
Internal Control (Related PSAs/PAPSs: PSA 400, 402 and 315) ledger and controlling account.
156. An auditor uses the knowledge provided by the understanding of internal control and the b. Distribution of payroll checks and approval of sales returns for credit.
assessed level of control risk primarily to c. Posting of amounts from both the cash receipts journal and cash payments journal to the
 general ledger.
d. Recording of cash receipts and preparation of bank reconciliations.
165. A small entity may use less formal means to ensure that internal control objectives are
achieved. For example, extensive accounting procedures, sophisticated accounting records,
or formal controls are least likely to be needed if
a. Management is closely involved in operations.
b. The entity is involved in complex transactions.
c. The entity is subject to legal or regulatory requirements also found in larger entities.
d. Financial reporting objectives have been established.
166. Which of the following most likely would not be considered an inherent limitation of the
potential effectiveness of an entitys internal control?
a. Incompatible duties.c. Mistakes in judgment.
b. Management override.d. Collusion among employees.
167. The internal auditor recognizes that certain limitations are inherent in any internal control
system. Which one of the following scenarios is the result of an inherent limitation of internal
control?
a. The comptroller both makes and records cash deposits.
b. A security guard allows one of the warehouse employees to remove company assets
from the premises without authorization.
c. The firm sells to customers on account, without credit approval.
d. An employee, who is unable to read, is assigned custody of the firm's computer tape
library and run manuals that are used during the third shift.
168. When considering the internal control structure, an auditor should be aware of the concept of
reasonable assurance, which recognizes that
a. Procedures requiring segregation of duties may be circumvented by employee collusion
and management override.
b. Establishing and maintaining the internal control structure is an important responsibility of
management.
c. The cost of an entitys internal control structure should not exceed the benefits expected
to be derived.
d. Adequate safeguards over access to assets and records should permit an entity to
maintain proper accountability.
169. It is important for the CPA to consider the competence of the audit clients employees
because their competence bears directly and importantly upon the
a. Cost/benefit relationship of the system of internal control.
b. Achievement of the objectives of the system of internal control.
c. Comparison of recorded accountability with assets.
d. Timing of the tests to be performed.
170. When an organization has strong internal control, management can expect various benefits.
The benefit least likely to occur is
a. Reduced cost 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.
171. Of the following statements about an internal control system, which one is not valid?
a. No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
b. Transactions must be properly authorized before such transactions are processed.
c. Because of the cost/benefit relationship, a client may apply control procedures on a test
basis.
d. Control procedures reasonably insure that collusion among employees can not occur.
172. The requirement that purchases be made from suppliers on an approved vendor list is an
example of a
a. Preventive control. c. Corrective control.
b. Detective control. d. Monitoring control.
173. Internal controls may be preventive, detective, or corrective. Which of the following is
preventive?
a. Requiring two persons to open mail.
b. Reconciling the accounts receivable subsidiary file with the control account.
c. Using batch totals.
d. Preparing bank reconciliations.
174. A good system of internal control provides reasonable assurance that errors and irregularities
will be detected or prevented. Identify the detective control for the procurement function.
a. Goods received are counted and compared to quantities on purchase order and receiving
reports.
b. The procurement function is organizationally separate from receiving, disbursing, and
accounting.
c. Review and approval of each procurement action is required prior to the final issuance of
a purchase order.
d. Prenumbered standard purchase order forms include all relevant terms required to be
used in all applicable instances.
175. Audit committees have been identified as a major factor in promoting both the internal and
external auditor's independence. Which of the following is the most important limitation on
the effectiveness of audit committees?
a. Audit committees may be composed of independent directors. However, those directors
may have close personal and professional friendships with management.
b. Audit committee members are compensated by the organization and thus favor a
shareholder's view.
c. Audit committees devote most of their efforts to external audit concerns and do not pay
much attention to internal auditing and the overall control environment.
d. Audit committee members do not normally have degrees in the accounting or auditing
fields.
176. CPAs may send a formal management letter to clients in order that such a letter may
provide
a. A summary of the CPAs observations arising out of his study of the clients internal
control system.
b. A written record of discussion between the auditor and the client concerning the formers
observations and suggestions for improvements in financial management.
c. A permanent record of the review of the internal control work accomplished by the auditor
during the course of his engagement.
d. Evidence as to the adequacy or inadequacy of the operating internal control system.
177. A conceptually logical approach to the auditor's evaluation of internal accounting control consists
of the following four steps:
I. Determine whether the necessary procedures are prescribed and are being followed
satisfactorily.
II. Consider the types of errors and irregularities that could occur.
III. Determine the internal accounting control procedures that should prevent or detect errors
and irregularities.
IV. Evaluate any weakness to determine its effect on the nature, timing, or extent of auditing
procedures to be applied and suggestions to be made to the client.
What should be the order in which these four steps are performed?
a. III, IV, I, II b. II, III, I, IV c. III, I, II, IV d. II, I, III, IV
178. Tests of controls are least likely to be omitted with regard to
a. Accounts believed to be subject to ineffective controls.
b. Accounts representing few transactions.
c. Accounts representing many transactions.
 d. Subsequent events. inventory.
179. To obtain evidential matter about control risk, an auditor selects tests from a variety of c. Final authorization of credit memos by personnel in the sales department could permit an
techniques including employee defalcation scheme.
a. Inquiry. b. Calculations. c. Analytical procedures. d. Confirmations. d. Fictitious transactions could be recorded, causing an understatement of revenues and
180. A procedure that would most likely be used by an auditor in performing tests of control overstatement of receivables.
procedures that involve segregation of functions and that leave no transaction trail is 188. Smith Manufacturing Companys accounts receivable clerk has a friend who is also Smiths
a. Inspection. b. Reperformance. c. Observation. d. Reconciliation. customer.The accounts-receivable clerk, on occasion, has issued fictitious credit
181. Which of the following controls would an entity most likely use to assist in satisfying the memorandums to his friend for goods supposedly returned. The most effective procedure for
completeness assertion related to long-term investments? preventing this type of activity is to
a. Senior management verifies that securities in the bank safe deposit box are registered in a. Prenumber and account for all credit memorandums.
the entitys name. b. Require receiving reports to support all credit memorandums before they are approved.
b. The internal auditor compares the securities in the bank safe deposit box with recorded c. Have all the sales department independent of the accounts-receivable department.
investments. d. Mail monthly statements.
c. The treasurer vouches the acquisition of securities by comparing brokers advices with 189. Proper authorization of write-offs of uncollectible accounts should be approved in which of the
canceled checks. following departments?
d. The controller compares the current market prices of recorded investments with the a. Accounts receivable. c. Accounts payable.
brokers advices on file. b. Credit. d. Treasurer.
182. Which of the following internal control procedures is not usually performed in the treasurers 190. Which of the following controls most likely would be effective in offsetting the tendency of
department? sales personnel to maximize sales volume at the expense of high bad debt write-offs?
a. Verifying the accuracy of checks and vouchers. a. Employees responsible for authorizing sales and bad debt write-offs denied access to
b. Controlling the mailing of checks to vendors. cash.
c. Approving vendors invoices for payment. b. Shipping documents and sales invoices are matched by an employee who does not have
d. Canceling payment vouchers when paid. authority to write off bad debts.
183. Which of the following controls would an entity most likely use in safeguarding against the c. Employees involved in the credit-granting function are separated from the sales function.
loss of marketable securities? d. Subsidiary accounts receivable records are reconciled to the control account by an
a. An independent trust company that has no direct contact with the employees who have employee independent of the authorization of credit.
record-keeping responsibilities has possession of securities. 191. At which point in an ordinary sales transaction of a wholesaling business would a lack of specific
b. The internal auditor verifies the marketable securities in the entitys safe each year on the authorization least concern the auditor conducting an audit?
balance sheet date. a. Determining discounts. c. Granting credit.
c. The independent auditor traces all purchases and sales of marketable securities through b. Selling goods for cash. d. Shipping goods.
the subsidiary ledgers to the general ledger. 192. An auditor observes the mailing of monthly statements to a clients customers and reviews
d. A designated member of the board of directors controls the securities in a bank safe evidence of follow-up on errors reported by the customers. This test of controls most likely is
deposit box. performed to support managements financial statement assertion(s) of
184. The treasurer makes disbursements by check and reconciles the monthly bank statements to a b c d.
accounting records. Which of the following best describes the control impact of this Presentation and disclosure Yes Yes No No
arrangement? Existence or occurrence Yes No Yes No
a. Internal control will be enhanced because these are duties that the treasurer should 193. An auditor tests an entitys policy of obtaining credit approved before shipping goods to
perform. customers in support of managements financial statement assertion of
b. The treasurer will be in a position to make and conceal unauthorized payments. a. Valuation or allocation. c. Existence or occurrence.
c. The treasurer will be able to make unauthorized adjustments to the cash account. b. Completeness. d. Rights and obligations.
d. Controls will be enhanced because the treasurer will have two opportunities to discover 194. Which of the following audit procedures would an auditor most likely perform to test controls
inappropriate disbursements. relating to managements assertion concerning the completeness of sales transactions?
185. From the standpoint of good internal control, the billing department, for good internal control a. Verify that extensions and footings on the entitys sales invoices and monthly customer
should be under directions of the statements have been recomputed.
a. Credit manager. b. Controller. c. Sales manager. d. Treasurer. b. Inspect the entitys reports of prenumbered shipping documents that have not been
186. To achieve good internal accounting control which department should perform the activities of recorded in the sales journal.
matching shipping documents with sales orders and preparing daily sales summaries? c. Compare the invoiced prices on prenumbred sales invoices to the entitys authorized
a. Billing. b. Credit . c. Shipping. d. Sales order. price list.
187. The most likely result of ineffective internal control policies and procedures in the revenue d. Inquire about the entitys credit granting policies and the consistent application of credit
cycle is that checks.
a. Irregularities in recording transactions in the subsidiary accounts could result in a delay in 195. To determine whether the system of internal accounting control operated effectively to minimize
goods shipped. errors of failure to invoice a shipment, the auditor would select a sample of transactions from the
b. Omission of shipping documents could go undetected, causing an understatement of population represented by the
 a. Customer order file.c. Open invoice file.
b. Bill of lading file.d. Sales invoice file.
196. Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate
controls over the invoicing function allow goods to be shipped that are not invoiced. The
inadequate controls could cause an
a. Understatement of revenues, receivables, and inventory.
b. Overstatement of revenues and receivables, and an understatement of inventory.
c. Understatement of revenues and receivables, and an overstatement of inventory.
d. Overstatement of revenues, receivables, and inventories.
197. Which of the following controls most likely addresses the completeness assertion for
inventory?
a. Work in process account is periodically reconciled with subsidiary records.
b. Employees responsible for custody of finished goods do not perform the receiving
function.
c. Receiving reports are prenumbered and periodically reconciled.
d. There is a separation of duties between payroll department and inventory accounting
personnel.
198. Which of the following controls most likely would be used to maintain accurate inventory
records?
a. Perpetual inventory records are periodically compared with the current cost of individual
inventory items.
b. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.
c. Requisitions, receiving reports, and purchase orders are independently matched before
payment is approved.
d. Periodic inventory counts are used to adjust the perpetual inventory records.
199. A weakness in internal control over recording retirements of equipment may cause an auditor
to
a. Inspect certain items of equipment in the plant and trance those items to the accounting
records.
b. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of
equipment during the year.
c. Trace additions to the other assets account to search for equipment that is still on hand
but no longer being used.
d. Select certain items of equipment from the accounting records and locate them in the
plant.
200. The primary responsibility of a bank acting as registrar of capital stock is to
a. Ascertain that dividends declared do not exceed the statutory amount allowable in the
state of incorporation.
b. Account for stock certificates by comparing the total shares outstanding to the total in the
shareholders subsidiary ledger.
c. Act as an independent third party between the board of directors and outside investors
concerning mergers, acquisitions, and the sale of treasury stock.
d. Verify that stock is issued in accordance with the authorization of the board of directors
and the articles of incorporation.
201. With well-developed internal control, employees in the same department most likely would
approve purchase orders, and also
a. Reconcile the open invoice file. c. Authorize requisition of goods.
b. Inspect goods upon receipts. d. Negotiate terms with vendors.
202. To strengthen the system of internal accounting control over the purchase of merchandise, a
companys receiving department should
a. Accept merchandise only if a purchase order or approval granted by the purchasing
department is on hand.
b. Accept and count all merchandise received from the usual company vendors.
c. Rely on shipping documents for the preparation of receiving reports.
d. Be responsible for the physical handling of merchandise but not for the preparation of
receiving reports.
203. For effective internal control, the accounts payable department generally should
a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
b. Ascertain that each requisition is approved as to price, quantity, and quality by an
authorized employee.
c. Obliterate the quantity ordered on the receiving department copy of the purchase order.
d. Establish the agreement of the vendors invoice with the receiving report and purchase
order.
204. Which of the following controls is not usually performed in the vouchers payable department?
a. Matching the vendors invoice with the related receiving report.
b. Approving vouchers for payment by having an authorized employee sign the vouchers.
c. Indicating the asset and expense accounts to be debited.
d. Accounting for unused prenumbered purchase orders and receiving reports.
205. In a properly designed internal accounting control system, the same employee may be permitted
to
a. Receive and deposit checks, and also approve write-offs of customer accounts.
b. Approve vouchers for payment, and also sign checks.
c. Reconcile the bank statements, and also receive and deposit cash.
d. Sign checks, and also cancel supporting documents.
206. In an audit of a purchasing department, which of the following ordinarily would be considered
a risk factor?
a. Purchase specifications are developed by the department requesting the material.
b. Purchases are made against blanket or open purchase orders for certain types of items.
c. Purchases are made from parties related to buyers or other company officials.
d. There is a failure to rotate purchases among suppliers included on an approved vendor
list.
207. Which of the following constitutes the most significant risk within the purchasing cycle?
a. Receiving department personnel sign receiving documents without inspecting or counting
the goods.
b. Large quantities of relatively inexpensive parts are stored in open areas near work
stations to reduce production slow-downs.
c. Poor records of transfers between warehouses often result in unnecessary purchases
and excess inventories.
d. Warehouse personnel do not compare quantities received to quantities shown on transfer
tickets.
208. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher
register to the supporting documents. Which assertion would this test of controls most likely
support?
a. Completeness.c. Valuation or allocation.
b. Existence or occurrence.d. Rights and obligations.
209. An entitys internal control requires for every check request that there be an approved
voucher, supported by a prenumbred purchase order and a prenumbered receiving report.
To determine whether checks are being issued for unauthorized expenditures, an auditor
most likely would select items for testing from the population of all
a. Purchase orders.c. Receiving reports.
b. Canceled checks.d. Approved vouchers.
210. From the point of view of good procedural control, distributing payroll checks to employees is
best handled by the
a. Treasurer's department.c. Employee's department supervisor.
b. Personnel department.d. Accounting department.
211. Which of the following procedures most likely would be considered a weakness in an entitys
 internal controls over payroll?
a. A voucher for the amount of the payroll is prepared in the general accounting department
based on the payroll summary.
b. Payroll checks are prepared by the payroll department and signed by the treasurer.
c. The employee who distributes payroll checks returns unclaimed payroll checks to the
payroll department.
d. The personnel department sends employees termination notices to the payroll
department.
212. During the audit the independent auditor identified the existence of a weakness in the clients
internal control and orally communicated this finding to the clients senior management and
audit committee. The auditor should
a. Consider the matter a scope limitation and therefore disclaim an opinion.
b. Document the matter in the working papers and consider the effects of the conditions on
the audit.
c. Suspend all audit activities pending directions from the clients audit committee.
d. Withdraw from the engagement.
213. During the planning phase of an audit, an auditor is identifying matters for communication to
the entitys audit committee. The auditor most likely would ask management whether
a. There was significant turnover in the accounting department.
b. It consulted with another CPA firm about installing a new computer system.
c. There were changes in the application of significant accounting policies.
d. It agreed with the auditors selection of fraud detection procedures.
214. Which of the following statements is correct concerning an auditors required communication
with an entitys audit committee?
a. This communication is required to occur before the auditors 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 to the audit committee.
215. How do the scope, procedures, and purpose of an examination of managements written
assertion on internal control compare to those for obtaining an understanding of internal
control and assessing control risk as part of an audit?
A b c d
Scope Similar Different Different Different
Procedures Different Similar Different Similar
Purpose Similar Simila rDifferent Different
216. Which of the following statements is incorrect concerning a client who outsources a portion of
its IT function?
a. Auditors need not be concerned with outsourced IT functions because those functions are
reviewed by other auditors.
b. The extent to which an auditor obtains an understanding of the service centers internal
controls should be based upon the same criteria used to determine the understanding
obtained for a clients internal controls.
c. It is common for a single independent auditor to obtain an understanding and test internal
controls of a service center for use by all its customers and their auditors.
d. None of the above is correct.
Evidence , procedures and working papers (Related PSAs: PSA 500(rev) PSA 501, 505, 510, 520,
540, 545, 550, 620, 560 ,580 and 230, PAPS 1000, 1005 and 1000Ph)
217. Assertions are representations of management that are embodied in financial statement
components. They can be either explicit or implicit. Which of these assertions is not about
valuation or allocation?
a. Property is recorded at historical cost.
b. Trade accounts receivable in the balance sheet are stated at net realizable value.
c. Notes payable in the balance sheet include all such obligations of the entity.
d. Property cost is systematically allocated to appropriate accounting period.
218. Which of the following relates to rights and obligations assertion?
a. All assets, liabilities and equity interests that should have been recorded have been
recorded.
b. Transactions and events that have been recorded have occurred and pertain to the entity.
c. Assets, liabilities, and equity interests are included in the financial statements at
appropriate amounts
d. The entity holds or controls the rights to assets, and liabilities are the obligations of the
entity.
219. Most of the independent auditors work in formulating an opinion on financial statements
consists of
a. Studying and evaluating internal control.
b. Obtaining and examining evidential matter.
c. Examining cash transactions.
d. Comparing recorded accountability with assets.
220. The principal reason for an independent auditor to gather and evaluate audit evidence is to
a. Form an opinion on the financial statements.
b. Detect fraud.
c. Evaluate management.
d. Evaluate internal control.
221. Which of the following statements concerning evidential matter is correct?
a. Competent evidence supporting managements assertions should be convincing rather
than merely persuasive.
b. An effective internal control structure contributes little to the reliability of the evidence
created within the entity.
c. The cost of obtaining evidence is not an important consideration to an auditor in deciding
what evidence should be obtained.
d. A clients accounting data cannot be considered sufficient audit evidence to support the
financial statements.
222. Which of the following statements relating to the competence of evidential matter is always
true?
a. Evidential matter gather by an auditor from outside an enterprise is reliable.
b. Accounting data developed under satisfactory conditions of internal control are more
relevant than data developed under unsatisfactory internal control conditions.
c. Oral representations made by management are not valid evidence.
d. Evidence gathered by auditors must be both valid and relevant to be considered
competent.
223. Audit information is usually considered relevant when it is
a. Derived through valid statistical sampling.
b. Objective and unbiased.
c. Factual, adequate, and convincing.
d. Consistent with the audit objectives.
224. Several types of documentary evidence were received by the auditor, but of these only one is
considered most reliable:
a. Working papers prepared by the chief accountant and reviewed personally by the VP for
finance.
b. A check issued by the treasurer with the payees endorsement, included with the
statement mailed by the bank directly to the auditor.
 c. A delivery receipt issued by the shipping department, signed by the customer, with an b. An auditor should determine whether a particular transaction would have occurred if the
accompanying copy of the sale invoice. parties had not been related.
d. Confirmation of the balance of an accounts payable mailed by and returned directly to the c. An auditor should substantiate that related party transactions were consummated on
auditor. terms equivalent to those that prevail in arms length transactions.
225. Which of the following types of audit evidence is the least persuasive? d. The audit procedures directed toward identifying related party transactions should include
a. Prenumbered purchase order forms. considering whether transactions are occurring but are not being given proper accounting
b. Bank statements obtained from the client. recognition.
c. Test counts of inventory performed by the auditor. 233. During the course of an audit engagement an auditor prepares and accumulates audit working
d. Correspondence from the clients attorney about litigation. papers. The primary purpose of the audit working papers is to
226. Theoretically, which of the following would not have an effect on the amount of audit evidence a. Aid the auditor planning his work.
gathered by the auditor? b. Provide a point of reference for future audit engagements.
a. The type of opinion to be issued. c. Support the underlying concepts included in the preparation of the basic financial
b. The auditors evaluation of internal control. statements.
c. The types of audit evidence available to the auditor. d. Support the auditor's opinion.
d. Whether or not the client reports to the Securities and Exchange Commission. 234. Which of the following pairs of accounts would an auditor most likely analyze on the same
227. Describe substantive audit tests in the context of an audit of financial statements. working paper?
a. Substantive tests are audit procedures that may be either tests of transactions, direct a. Notes receivable and interest income.
tests of financial balances, or analytical tests. b. Accrued interest receivable and accrued interest payable.
b. Substantive tests are audit procedures that may be eliminated under certain conditions. c. Notes payable and notes receivable.
c. Substantive tests are audit procedures that are designed to discover significant d. Interest income and interest expense.
subsequent events. 235. Which of the following factors most likely would affect an auditors judgment about the
d. Substantive tests are audit procedures that will increase proportionately with the auditors quantity, type, and content of the auditors working papers?
reliance on internal control. a. The assessed level of control risk.
228. In performing an audit, which one of the following procedures would be considered a b. The likelihood of a review by a concurring (second) partner.
substantive test? c. The number of personnel assigned to the audit.
a. Comparing last years interest expense with this years interest expense. d. The content of the management representation letter.
b. Comparing signatures on checks with the signatures of authorized check signers. 236. The permanent (continuing) file of an auditors working papers most likely would include
c. Reviewing initials on received documents. copies of the
d. Reviewing procedures followed in receiving, depositing, and disbursing cash. a. Lead schedules. c. Bank statements.
229. A basic premise underlying the application of analytical procedures is that b. Attorneys letters. d. Debt agreements.
a. The study of financial ratios is an acceptable alternative to the investigation of unusual Sampling (Related PSA: PSA 530)
fluctuations. 237. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk
b. Statistical tests of financial information may lead to the discovery of material too high (risk of under-reliance) on internal accounting control relate to the
misstatements in the financial statements. a. Efficiency of the audit. c. Selection of the sample.
c. Plausible relationships among data may reasonably be expected to exist and continue in b. Effectiveness of the audit. d. Audit quality controls.
the absence of known conditions to the contrary. 238. Statistical sampling provides a technique for
d. These procedures cannot replace tests of balances and transactions. a. Exactly defining materiality.
230. The auditor will most likely perform extensive tests for possible understatement of b. Greatly reducing the amount of substantive testing.
a. Revenues.b. Liabilities.c.Assets.d.Capital. c. Eliminating judgment in testing.
231. Karl, an auditor with extensive experience in the retail industry, is assigned to audit the d. Measuring the sufficiency of evidential matter.
reasonableness of accounting estimates in the year 1 financial statements of Haas Company. 239. At times a sample may indicate that the auditor's planned degree of reliance on a given control
Haas Company, which was formed in year 1, markets fishing nets. Which of the following is is reasonable when, in fact, the true compliance rate does not justify such reliance. This situation
the least important consideration for Karl in his audit of the reasonableness of accounting illustrates the risk of
estimates? a. Over-reliance. c. Incorrect precision.
a. An inexperienced employee at Haas prepared the financial statements and was entirely b. Under-reliance. d. Incorrect rejection.
responsible for the accounting estimates. 240. When assessing the tolerable rate, the auditor should consider that, while deviations from
b. Karl has never been involved in an audit of a company that sells fishing nets. control procedures increase the risk of material errors, such deviations do not necessarily result
c. The accounting estimates in the financial statements of Haas Company are based on in errors. This explains why
numerous significant assumptions. a. A recorded disbursement that does not show evidence of required approval may
d. The accounting estimates in the financial estimates are susceptible to bias. nevertheless be a transaction that is properly authorized and recorded.
232. Which of the following statements is true about related party transactions? b. Deviations would result in errors in the accounting records only if the deviations and the
a. In the absence of evidence to the contrary, related party transactions should be assumed errors occurred on different transactions.
to be outside the ordinary course of business. c. Deviations from pertinent control procedures at a given rate ordinarily would be expected to
 result in errors at a higher rate. example of a variable that can be tested using statistical sampling technique would be:
d. A recorded disbursement that is properly authorized may nevertheless be a transaction that a. The number of errors in the client-prepared aging schedule of accounts receivable.
contains a material error. b. The balance in the accounts receivable account.
241. In audit sampling contexts, precision is c. Compliance with the requirement that each voucher be initialed by the treasurer before a
a. A characteristic of the population at hand and is not under the direct control of the auditor. check is prepared for payment of the voucher.
b. A measure of the accuracy with which one has generated sample estimates. Desired d. The number of entries improperly posted to a job order cost card.
precision must be established before the sample is obtained and evaluated. 247. Some conditions leading to a larger sample size in substantive testing:
c. Evaluated independently of reliability in a given sample. - Reliance on internal control
d. Important for evaluating variables samples, but not attributes samples. 1.1 higher reliance
242. Conditions leading to smaller sample size in compliance testing: 1.2 lower reliance
- Reliance on internal control - Reliance on other substantive tests related or same audit objectives as class of
1.1 lower reliance transactions
1.2 higher reliance 2.1 higher reliance
- Acceptance rate of deviation from planned reliance on internal control 2.2 lower reliance
2.1 lower acceptable rate - Measure of tolerable errors for a specific audit objective
2.2 higher acceptable rate 3.1 larger measure
- Allowance risk of over reliance 3.2 smaller measure
3.1 lower risk - Expected size and frequency of errors
3.2 higher risk 4.1 larger errors or higher frequency
- Likely rate or population deviation 4.2 smaller errors or lower frequency
4.1 lower expected rate a. Combination of 1.2, 2.2, 3.2, 4.1c. Combination of 1.2, 2.2, 3.1, 4.2
4.2 higher expected rate b. Combination of 1.1, 2.1, 3.2, 4.1d. Combination of 1.1, 2.1, 3.1, 4.2
a. Combination of 1.1, 2.1, 3.1, 4.1 248. Which of the following statements is correct concerning the auditors use of statistical
b. Combination of 1.2, 2.1, 3.1, 4.2 sampling?
c. Combination of 1.1, 2.2, 3.2, 4.1 a. An auditor needs to estimate the peso amount of the standard deviation of the population
d. Combination of 1.2, 2.2, 3.2, 4.2 to use classical variables sampling.
243. In testing payroll transactions, an auditor discovers that four out of a statistical sample of one b. An assumption of PPS sampling is that the underlying accounting population is normally
hundred selected time cards were not signed by the appropriate supervisor. To evaluate the distributed.
materiality or significance of this control deficiency, the auditor should c. A classical variables sample needs to be designed with special considerations to include
a. Compare the tolerable deviation rate with the expected deviation rate. negative balances in the sample.
b. Compute an upper precision limit and compare with the tolerable rate. d. The selection of zero balances usually does not require special sample design
c. Evaluate the dollar amount of the four time cards in relation to the financial statements. considerations when using PPS sampling.
d. Report the deviations and let management assess the significance because they are in 249. An auditor selects a preliminary sample of 100 items out of a population of 1,000 items. The
the best position to know. sample statistics generate an arithmetic mean of P60, a standard deviation of P6 and a
standard error of the mean of P.60. If the sample was adequate for the auditor's purposes
The next two questions are based on the following: and the auditor's desired precision was plus or minus P1,000, the minimum acceptable peso
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. value of the population would be
The auditor designed a statistical sample that would provide 1% risk of assessing control risk a. P61,000b. P59,000 c. P60,000 d. P58,800
too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The 250. The statistical sampling drawn from a population of invoices indicates a mean value of P150
auditor estimated from previous experience that about 2% of the sales invoices lacked and sampling precision of + P30 at a 95% confidence level. What is the correct interpretation
approval. A sample of 200 invoices was examined and 7of them were lacking approval. The of this sample data?
auditor then determined the achieved upper precision limit to be 8%. a. In repeated sampling, the point estimates of the true population mean will be P150 about
244. In the evaluation of this sample, the auditor decided to increase the level of the preliminary 95% of the time.
assessment of control risk because the b. In repeated sampling, the true population mean will fall in the precision range of P120 to
a. Tolerable rate (7%) was less than the achieved upper precision limit. P180 about 95% of the time.
b. Expected deviation rate (7%) was more than the percentage of errors in the sample c. There is a 95% probability that the true population mean falls in the range of P135 and
(3%) P165.
c. Achieved upper precision limit (8%) was more than the percentage of errors in the sample d. There is a 95% probability that the true population mean is P150.
(3%). Completing the Audit and Post-Audit Responsibilities
d. Expected deviation rate (2%) was less than the tolerable rate (7%). 251. The primary objective of analytical procedures used in the final review stage of an audit is to
245. The allowance for sampling risk was a. Obtain evidence from details tested to corroborate particular assertions.
a. 5%b. 3% c. 4% d. 1 % b. Identify areas that represent specific risks relevant to the audit.
246. Statistical sampling techniques may be used to sample attributes as well as variables. An 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 existence.
252. An auditor is concerned with completing various phases of the examination after the balance-
sheet date. This "subsequent period" extends to the date of the
a. Auditor's report.
b. Final review of the audit working papers.
c. Public issuance of the financial statements
d. Delivery of the auditor's report to the client.
253. Which of the following procedures would most likely be performed in connection with a review
of subsequent events?
a. Test of shipping cut-offs.
b. Review of cut-of bank statements.
c. Vouching of subsequent payments of accounts payable
d. Reading of minutes of meetings of stockholders and board of directors up to the date of
the audit report.
254. Which of the following material events occurring subsequent to the balance sheet date would
require an adjustment to the financial statements before they are issued?
a. Sale of long-term debt or capital stock.
b. Loss of a plant as a result of a flood.
c. Major purchase of a business which is expected to double sales volume.
d. Settlement of litigation, in excess of the recorded liability.
255. The auditor's primary means of obtaining corroboration of management's information
concerning litigation is a
a. Letter of audit inquiry to the client's lawyer.
b. Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
c. Confirmation of claims and assessments from the other parties to the litigation.
d. Confirmation of claims and assessments from an officer of the court presiding over the
litigation.
256. Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entitys ability to continue as a going concern?
a. Cash flows from operating activities are negative.
b. Research and development projects are postponed.
c. Significant related party transactions are pervasive.
d. Stock dividends replace annual cash dividends.
257. Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue
as a going concern for a reasonable period of time. In evaluating Zeros plans for dealing
with the adverse effects of future conditions and events, Cooper most likely would consider,
as a mitigating factor, Zeros plans to
a. Discuss with lenders the terms of all debt and loan agreements.
b. Strengthen internal controls over cash disbursements.
c. Purchase production facilities currently being leased from a related party.
d. Postpone expenditures for research and development projects.
258. When an auditor concludes there is a substantial doubt a continuing audit clients ability to
continue as a going concern for a reasonable period of time, the auditors responsibility is to
a. Issue a qualified or adverse opinion, depending upon materiality, due to the possible
effects on the financial statements.
b. Consider the adequacy of disclosure about the clients possible inability to continue as a
going concern.
c. Report to the clients audit committee that managements accounting estimates may need
to be adjusted.
d. Reissue the prior years auditors report and add an explanatory paragraph that
specifically refers to substantial doubt and going concern.
259. It is an accepted practice for external auditors to request letter of representation from their
clients. A principal purpose of a letter of representation form the client is to
a. Discharge the auditor from legal liability of his examination.
b. Confirm in writing managements approval of limitations on the scope of audit.
c. Serve as an introduction to companys personnel and authorization to examine the
records.
d. Remind management for its primary responsibility for financial statements.
260. Items for inclusion in management representation letter are normally:
a. Determined by management.
b. Covering all the accounts in the financial statements
c. Determined by auditors based on the circumstances of the engagement.
d. Based on ASPCs standard list.
261. Which of the following events occurring after the issuance of an auditors report most likely
would cause the auditor to make further inquiries about the previously issued financial
statements?
a. An uninsured natural disaster occurs that may affect the entitys ability to continue as a
going concern.
b. A contingency is resolved that had been disclosed in the audited financial statements.
c. New information is discovered concerning undisclosed lease transactions of the audited
period.
d. A subsidiary is sold that accounts for 25% of the entitys consolidated net income.
Audit report (Related PSAs: PSA 700, 710, 720, 560, 570, 600 and 620)
262. The fist standard of reporting requires that, the report shall state whether the financial
statements are presented in accordance with generally accepted accounting principles. This
should be construed to require
a. A statement of fact by the auditor.c. An opinion by the auditor.
b. An implied measure of fairness.d. An objective of compliance.
263. When expressing 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.
264. How are management's responsibility and the auditor's responsibility represented in the
standard auditor's report?
A B C
D
Managements responsibility Explicitly Implicitly Implicitly Explicitly
Auditors responsibility Explicitly Implicitly Explicitly Implicitly
265. Which of the following representations does an auditor make explicitly and which implicitly
when issuing an unqualified opinion?
A B C D
Conformity with GAAP Explicitly Implicitly Implicitly Explicitly
Adequacy of disclosure Explicitly Implicitly Explicitly Implicitly
266. The existence of audit risk is recognized by the statements in the auditors standard report
that the
a. Auditor is responsible for expressing an opinion on the financial statements, which are the
responsibility of management.
b. Financial statements are presented fairly, in all material respects, in conformity with
GAAP.
c. Audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
d. Auditor obtains reasonable assurance about whether the financial statements are free of
material misstatements.
267. Which of the following accounting changes does not affect consistency?
a. Change in accounting principle. c. Change in accounting estimates
b. Change in the reporting entity. d. Correction of an error in principle.
268. In which of the following circumstances may the auditor issue an unqualified standard audit
report?
a. There has been a departure from GAAP.
b. There has been a lack of consistency of applying GAAP.
c. The auditor relies on the report of another auditor.
d. There are questions about the continued existence of the entity.
269. When audited financial statements are presented in a clients 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 auditors report without changing the opinion on the
financial statements.
c. Perform the appropriate substantive auditing procedures to corroborate the other
information.
d. Read the other information to determine that it is consistent with the audited financial
statements.
270. An auditors report on comparative financial statements should be dated as of the date of the
a. Issuance of the report.
b. Completion of the auditors recent field work.
c. Latest financial statements
d. Last subsequent event disclosed in the statements.
271. In determining the type of opinion to express, an auditor assesses the nature of the reporting
qualification and the materiality of their effects. Materiality will be the primary factor
considered in the choice between
a. An except for opinion and an adverse opinion.
b. An except for opinion and a subject to opinion.
c. An adverse opinion and a disclaimer of opinion.
d. A subject to opinion and a piecemeal opinion.
272. In which of the following circumstances would an auditor usually choose between issuing a
qualified opinion or a disclaimer of opinion?
a. Departure from GAAP.
b. Inadequate disclosure of accounting policies.
c. Inability to obtain sufficient competent evidential matter.
d. Unreasonable justification for a change in accounting principle.
273. A client is presenting comparative (2-year) financial statements. Which of the following is
correct concerning reporting responsibilities of a continuing auditor?
a. The auditor should issue one audit report which 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.
274. When financial statements of a prior period are presented on a comparative basis with
financial statements of the current period, the continuing auditor is responsible for
a. Expressing dual dated opinions.
b. Updating the report on the previous financial statements only if there has not been a
change in the opinion.
c. Updating the report on the previous financial statements only if the previous report was
qualified and the reasons for the qualification no longer exist.
d. Updating the report on the previous financial statements regardless of the opinion
previously issued.
275. Mead, CPA, had substantial doubt about Tech Co.s ability to continue as a going concern
when reporting on Techs audited financial statements for the year ended June 30, 2005.
That doubt has been removed in 2006. What is Meads reporting responsibility if Tech is
presenting its financial statements for the year ended June 30, 2006, on a comparative basis
with those of 2005?
a. The explanatory paragraph included in the 2005 auditors report should not be repeated.
b. The explanatory paragraph included in the 2005 auditors report should be repeated in its
entirety.
c. A different explanatory paragraph describing Meads reasons for the removal of doubt
should be included.
d. A different explanatory paragraph describing Techs plans for financial recovery should be
included.
276. 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 would consider
issuing:
a. Qualified or adverse opinion c. Unqualified opinion with explanatory paragraph
b. Qualified or disclaimer of opinion d. Unqualified opinion.
Auditing in a CIS environment (Related PSAs/PAPSs: PSA 401; PAPS 1001, 1002, 1003, 1008
and 1009)
277. A common difficulty in auditing a computerized accounting system is:
a. Data can be erased from the computer with no visible evidence.
b. Because of the lack of an audit trail, computer systems have weaker controls and more
substantive testing is required.
c. Because of the uniform nature of transaction processing, computer systems have strong
controls and less substantive testing is required.
d. The large dissemination of entry points into the computer system leads to weak overall
reliance on information generated by a computer.
278. Which of the following would not be an appropriate procedure for testing the general control
activities of an information system?
a. Inquiries of client personnel.
b. Inspecting computer logs.
c. Testing for the serial sequence of source documents.
d. Examination of the organizational chart to determine the segregation of duties.
279. 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. General controls. c. User controls.
b. Quantitative test controls. d. Application controls.
280. When erroneous data are detected by computer program controls, such data may be excluded
from processing and printed on an error report. This error report should be reviewed and
followed up by the
a. Computer operator. c. EDP control group.
b. Systems analyst. d. Computer programmer.
281. The computer is sometimes blamed for making errors. In reality, computers make very few
mechanical errors. The most likely source of errors in a fully operational computer-based
system is due to
a. Systems analysis. c. Input.
b. Programming. d. Processing.
282. The characteristics that distinguish computer processing from manual processing include the
following:
(1) Computer processing uniformly subjects like transactions to the same instructions.
(2) Computer systems always ensure that complete transaction trails useful for audit
purposes are preserved for indefinite period
(3) Computer processing virtually eliminates the occurrence of clerical errors normally
 associated with manual processing. appears to be missing?
(4) Control procedures as to segregation of functions may no longer be necessary in a a. Completeness test. c. Limit test.
computer environment. b. Validity test. d. Control total.
a. All of the above statements are true. c. Only statements (2) and (4) are true. 292. Bank tellers and their supervisors sign on to an online deposit system with their employee
b. Only statements (1) and (3) are true. d. All of the above statements are false. numbers, which are readily available to all tellers. The bank wants to prevent teller access to
283. The increased use of database processing systems makes managing data and information a certain approval functions, such as withdrawals over a specified dollar limit. The best control
major information service function. Because the databases of an organization are used for for implementing this restriction would be
many different applications, they are coordinated and controlled by a database administrator. a. Tagging. b. Passwords. c.Callback. d.Logs.
The functions of a database administrator are 293. Which of the following tasks could not be performed when using a generalized audit software
a. Data input preparation, database design, and database operations. package?
b. Database design, database operation, and database security. a. Selecting inventory items for observation.
c. Database design, database operation, and equipment operations. b. Physical count of inventories.
d. Database design, software support, and database security. c. Comparison of inventory test counts with perpetual records.
284. When a new application is being created for widespread use in a large organization, the d. Summarizing inventory turnover statistics for obsolescence analysis.
principal liaison between the Information Systems (IS) department and the rest of an 294. Parallel simulation is an audit technique employed to verify processing logic by making use of
organization is normally a(n) audit test programs. These audit test programs simulate the processing logic of an
a. End user.c. Maintenance programmer. application program or programs under review. Which statement indicates the use of parallel
b. Application programmer.d. Systems analyst. simulation audit technique?
285. Which of the following procedures would enhance the control structure of a computer a. Live transactions are processed using live programs.
operations department? b. Live transactions are processed using test master file.
I. Periodic rotation of operators. c. Test transactions are processed using test programs.
II. Mandatory vacations. d. Live transactions are processed using test programs.
III. Controlled access to the facility. 295. Which of the following computer-assisted auditing techniques allows fictitious and real
IV. Segregation of personnel who are responsible for controlling input and output. transactions to be processed together without client operating personnel being aware of the
a. I, II. b. III, IV. c. I, II, III. d. I, II, III, IV. testing process?
286. The most critical aspect of the separation of duties within a mainframe information systems a. Parallel simulationc. Test data approach
environment is between b. Integrated test facility approachd. Exception report tests
a. Programmers and project leaders. c. Programmers and users. 296. Which of the following statement is not true about test data?
b. Programmers and systems analysts. d. Programmers and computer operators. a. Test data should consist only of conditions that interest the auditor.
287. Which of the following best describes the primary reason that organizations develop b. Only one transaction of each type need be tested.
contingency plans for their EDP operations? c. Test data must consist of all possible valid and invalid conditions.
a. To ensure that they will be able to process vital transactions in the event of any type of d. Test data are processed by the clients software under the auditors control.
disaster. 297. Which of the following is an incorrect statement regarding testing strategies related to
b. To ensure the safety of important records. auditing through the computer?
c. To help hold down the cost of insurance. a. The test data approach involves processing the clients data on a test basis to determine
d. To plan for sources of capital for recovery from any type of disaster. the integrity of the system.
288. A critical aspect of a disaster recovery plan is to be able to regain operational capability as b. The test data approach involves processing the auditors test data on the clients
soon as possible. In order to accomplish this, an organization can have an arrangement with computer system to determine whether computer-performed controls are working
its computer hardware vendor to have a fully operational facility available that is configured to properly.
the user's specific needs. This is best known as a(n) c. Test data should include all relevant data conditions that the auditor is interested in
a. Uninterruptible power system. c. Cold site. testing.
b. Parallel system. d. Hot site. d. When the auditor uses the embedded audit module approach, an audit module is inserted
289. Which of the following is a general control that would most likely assist an entity whose in the clients system to capture transactions with certain characteristics.
systems analyst left the entity in the middle of a major project? 298. Auditing by testing the input and output of a computer system--i.e., auditing "around" the
a. Grandfather-father-son record retention. c. Systems documentation. computer--instead of the computer software itself will
b. Input and output validation routines. d. Check digit verification. a. Not detect program errors that do not appear in the output sampled.
290. Program documentation is a control designed primarily to ensure that b. Detect all program errors, regardless of the nature of the output.
a. Programmers have access to the tape library or information on disk files. c. Provide the auditor with the same type of evidence.
b. Programs do not make mathematical errors. d. Not provide the auditor with confidence in the results of the auditing procedures.
c. Programs are kept up to date and perform as intended.
d. Data have been entered and processed. Other services (Related PSAs: PSA 910, 920, 930, 800, 810)
291. A company's labor distribution report requires extensive corrections each month because of 299. A CPA's report on agreed-upon procedures related to management's assertion about an
labor hours charged to inactive jobs. Which of the following data processing input controls entity's compliance with specified requirements should contain:
 a. A statement of limitations on the use of the report. statements.
b. An opinion about whether management's assertion is fairly stated. a. Study of the relationships of the elements of the financial statements.
c. Negative assurance that control risk has not been assessed. b. Comparison of the financial statements with statements for prior period.
d. An acknowledgment of responsibility for the sufficiency of the procedures. c. Comparison of the financial statements with anticipated results and financial position.
300. Which of the following procedures does an accountant in a compilation engagement of a d. Comparison of inventory listing with physical inventory count.
nonpublic entity ordinarily perform? 307. The Review Report include the following:
a. Reading the financial statements to consider whether they are free of obvious mistakes in A B C D
the application of accounting principles. Reference to Philippine Standard on Auditing Yes No Yes No
b. Obtaining written representations from management indicating that the compiled financial applicable to review engagement.
statements will not be used to obtain credit. A statement that a review is limited to inquiries Yes Yes Yes No
c. Making inquiries of management concerning actions taken at meetings of the and analytical procedures
stockholders and the board of directors. Specific description of procedures that have
d. Applying analytical procedures designed to corroborate management's assertions that are been performed by the auditor No Yes Yes No
embodied in the financial statement components. 308. Which of the following is not included in the scope paragraph of a review report?
301. The objective of a review of interim financial information of a public entity is to provide an a. A statement that a review is limited primarily to inquires and analytical procedures.
accountant with a basis for reporting whether: b. A reference to Philippine Standard on Auditing applicable to review engagement.
a. A reasonable basis exists for expressing an updated opinion regarding the financial c. A statement the review included an evaluation of reasonableness of accounting estimates
statements that were previously audited. made by management.
b. Material modifications should be made to conform with generally accepted accounting d. A statement that an audit has not been performed.
principles. 309. In a review engagement, if there has been a material scope limitation, the auditor should
c. The financial statements are presented fairly in accordance with standards of interim describe the limitation in the review report and either
reporting. a. Express a qualification of the negative assurance or not provide any assurance.
d. The financial statements are presented fairly in accordance with generally accepted b. Express a qualification of the negative assurance provided or issue an adverse statement
accounting principles. that the financial statement are not presented fairly.
302. The objective of an agreed upon-procedures engagement is for the auditor to: c. Express an adverse statement that the financial statements are not presented fairly or the
a. Carry out procedures of an audit nature to which the auditor and the entity and any auditor not issue any assurance.
appropriate third parties have agreed and to report on factual findings. d. Not modify the negative assurance or not issue an assurance.
b. Carry out procedures of a review nature to which the auditor and the entity and any 310. An auditor's report would be designated as a special report when it is issued in connection
appropriate third parries have agreed and to report on factual findings. with financial statements that are
c. Carry out procedures of a review nature and to express limited assurance based on those a. For an interim period and are subjected to a limited review.
agreed procedures. b. Unaudited and are prepared from a client's accounting records.
d. Carry out procedures of an audit nature and is express limited assurance. c. Prepared in accordance with a comprehensive basis of accounting other than generally
303. Which of the following is incorrect about agreed-upon procedures engagement? accepted accounting principles.
a. An engagement to perform agreed-upon procedures may involve the auditor in d. Purported to be in accordance with generally accepted accounting principles but do not
performing certain procedures concerning individual items of financial data. include a presentation of the Statement of Cash Flows.
b. Users of the agreed-upon procedures report assess for themselves the procedures and
findings reported by the auditor and draw their conclusion from the auditors work.
c. The auditor should be independent of the financial data or financial statements where
agreed procedures have to be applied.
d. The report is restricted to those parties that have agreed to the procedures to be
preformed.
304. Which of the following should the auditor perform in a review engagement ?
a. Understand matters that are relevant to the financial statements.
b. Understand the entitys internal control system.
c. Observe the physical count of inventory.
d. Inquire of legal counsel of pending litigations.
305. Matters to be agreed in an agreed-upon procedures engagement include the following,
except:
a. Stated purpose of the engagement
b. Limitations on distribution of the report of factual findings.
c. Anticipated form of the report and the level of assurance to be provided
d. Nature, timing and extent of the specific procedures to be applied.
306. Which of the following is least likely done by the auditor in conducting a review of financial