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PHILIPPINE ACCOUNTANCY ACT OF 2004 (RA9298)


1. The Professional Regulatory Board of Accountancy shall be composed of a chairman
and (LIST A) members to be appointed by the President of the Phils. from a list of (LIST
B) recommendees for each position and ranked by the Commission, from a list of five (5)
nominees for each position submitted by <LIST C>.
LIST A LIST B LIST
C

a. 6 5 BOA,

b. 7 5 PRC

c. 7 3 PICPA

d. 6 3 APO

Answer: d
2. The PICPA shall submit its nominations with supporting documentation

a. Within 60 days prior to the expiry of the term of an incumbent member or chair-
man

b. Within 90 days prior to the expiry of the term of an incumbent member or chair-
man
c. Not later than 60 days prior to the expiry of the term of an incumbent member or
chairman
d. Not later than 90 days prior to the expiry of the term of an incumbent member or
chairman
Answer: c
3. Which of the following statements about the composition of the Board of Accountancy
is incorrect?
a. The four sectors in the practice of accountancy shall as much as possible be equi-
tably represented in the Board.

b. The Board shall be composed of a chairman and six members.


c. The members of the Board shall be appointed by the President of the Philippines
from a list of three recommendees for each position and ranked by the Commis-
sion, from a list of five nominees for each position submitted by Accredited Pro-
fessional Organization (APO).
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d. d. The Board shall elect a vice- chairman from among its members to serve for a
term of three years.

Answer: d
4. The following statements relate to the term of office of the chairman and the members
of the Board of Accountancy (BOA).
I. No person who has served two (2) successive complete terms shall be eligible for
reappointment until the lapse of one (1) year
II. Appointment to fill up an unexpired term is not to be considered a complete term
III. A person may serve in the Board of Accountancy for eight consecutive years.
IV. A person may serve in the Board for more than 12 years.

a. All statements are true c. Only IV is false

b. All statements are false d. Only I and II are true


Answer: d
5. Which of the following is not among the qualifications of a member of the Board of
Accountancy?

a. He/ She must have at least 10 years of experience in the practice of accountancy

b. He/ She must be a natural-born CPA and a resident; of the Philippines


c. He/ She must not be a director or officer of the accredited national professional
organization at the time of appointment.
d. He/ She must not have any direct or indirect pecuniary interest in any school of-
fering BS Accountancy degree
Answer: b
6. Which of the following is not a valid ground for suspension or removal of a member of
the Board. of Accountancy?

a. Being investigated of a crime involving moral turpitude.

b. Neglect of duty or incompetence

c. Manipulating the CPA licensure examination results.

d. Violating RA9298.
Answer: a
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7. The standard setting body created by the PRC to promulgate accounting standards that
will be generally accepted in the Philippines is known as

a. Financial Reporting Standards Council (FRSC)

b. Auditing Standards and Practices Council (ASPC)

c. Accounting Standards Council (ASC)

d. Auditing and Assurance Standards Council (AASC)


Answer: a
8. The Financial Reporting Standards Council shall be composed of a chairman and
a. 14 members b. 17 members c. 8 members d. 15 members
Answer: a
9. The sector that is most represented in the Auditing and Assurance Standards Council is
the

a. Commerce and Industry c. Public Practice

b. Academe d. Government
Answer: c
10. Which of the following is not represented in the FRSC?
a. ACPAPP
b. FINER
c. Commission on Audit
d. Securities and Exchange Commission
Answer: a
11. The term of office of each member of AASC and FRSC is
a. 2 years, renewable c. 3 years, non renewable
b. 4 years, non renewable d. 3 years, renewable
Answer: d
12. Which of the following statements about Accounting Standard Setting Council is
correct?
a. The accounting standard setting body is known as Accounting Standards Council
(ASC).
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b. The accounting standard setting body is composed of a chairman and fifteen


members.
c. The chairman and members of the standard setting council shall be appointed by
the Commission upon the recommendation of the Board in coordination with the
accredited national professional organization.
d. The public accounting practice is the sector that is most represented in the ac-
counting standard setting council.
Answer: c
13. Which of the following best describes the function of Auditing and Assurance Stand-
ards Council?

a. To monitor full compliance by auditors to PSAs


b. To promulgate auditing standards, practices and procedures that shall be general-
ly accepted by the accounting profession in the Philippines
c. To assist the Board of Accountancy in conducting administrative proceedings on
erring CPAs in public practice

d. To undertake continuing research on both auditing and financial accounting in or-


der to make them responsive to the needs of the public
Answer: b
14. The following are represented both to the Financial Reporting Standards Council
(FRSC) and Auditing and Assurance Standards Council (AASC), except

a. Commission on Audit

b. Bureau of Internal Revenue


c. Securities and Exchange Commission

d. Board of Accountancy
Answer: b
15. The following statements relate to the RA9298. Which statement is true?

a. Within two years, subject to certain conditions, the Board of Accountancy may
order the reinstatement of a CPA whose certificate of registration has been re-
voked.
b. The Professional Regulation Commission has the authority to remove any mem-
ber of the Board of Accountancy for negligence, incompetence, or any other just
cause.
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c. Insanity is not a ground for proceeding against a CPA.


d. No person shall be appointed as a member of the Board of Accountancy unless
he has been in the practice of accountancy for at least 10 years, among others.

Answer: d
16. The following are the qualifications of applicants for CPA Examinations; except
I. Must be a natural born Filipino citizen
II. Must be a BS Accountancy degree holder
III. Must be of good moral character
IV. Must be at least 21 years old
a. I only b. II and TV c. IV only d. I and IV

Answer: d
17. Which of the following statements is correct?
a. Any candidate who fails in two (2) complete CPA board examinations will no
longer be allowed to take another set of examination.
b. Any candidate who fails in two (2) complete CPA board examinations shall be
disqualified from taking another set of examinations unless he/she submits evi-
dence to the satisfaction of the Board that he/she enrolled in and completed at
least 21 units of subjects given in the licensure examination.
c. The examination in which the candidate was conditioned and the removal exami-
nation on the subject in which he/she failed shall be counted as one complete ex-
aminations.
d. The refresher course should be completed within two (2) years from the preced-
ing examination.

Answer: c
18. The Board of Accountancy shall submit to the PRC the ratings obtained by each can-
didate within days after the examination, unless extended for just cause.
a. 10 b. 5 c. 2 d. 3
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Answer: a
19. Which of the following shall be issued to a candidate who passes the CPA licensure
examination?

a. Certificate of accreditation to practice public accountancy and PRC ID:


b. Personal identification card and a certificate of accreditation to practice public ac-
countancy

c. Certificate of registration and professional identification card

d. Certificate of full compliance and PRC ID.

Answer: c
20. The Board of Accountancy may issue certificate of registration and professional iden-
tification card to any successful examinee:
a. Of unsound mind
b. Convicted by a court of political offense.
c. Guilty of immoral or dishonorable conduct.
d. Who has falsely represented himself/ herself in his /her application for , examina-
tion.

Answer: b
21. The following statements relate to roster of CPAs. Identify the incorrect statement.
a. A roster showing the names and place of business of all registered CPAs shall be
prepared and updated by the Board.

b. Copies of the roster shall be made available to any party as may be deemed neces-
sary.
c. The Board, upon approval of the Commission, may delegate the preparation of
this roster to the APO.
d. The publication of the roster in the official gazette or in any major newspaper of
public circulation shall be deemed compliance with the requirement of RA 9298.

Answer: d
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22. Any person who shall violate any of the provisions of the Accountancy Act or any of
its implementing rules and regulations promulgated by the Board of Accountancy subject
to the approval of the PRC, shall upon conviction , be punished by
a. Lethal injection
b. A fame of not more than P50,000
c. An imprisonment for a period not exceeding two years
d. Both b and c.
Answer: c
23. PRC- CPE Council differs from AASC and FRSC in that

a. PRC-CPE Council members are appointed by the Commission.

b. PRC-CPE Council is composed of a chairman and 14 members

c. The chairperson of PRC-CPE Council is elected by the members of the Board


from among themselves.

d. PRC-CPE Council members are co-terminus with the President of the Philippines.

Answer: c
24. Which of the following statements is correct about the PRC-CPE Council?

a. The Council shall be composed of six members and a chairperson.

b. The Council shall be composed of two members and a chairperson.


c. The members of the Council shall be appointed by the Commission upon recom-
mendation of the Board in coordination with APO.
d. The chairperson and members of the Council shall have a term of three years re-
newable for another term.

Answer: b
25. Which statement is correct regarding CPF, requirements for renewal of professional
license?

a. The total CPE credit units required for CPAs shall be sixty (60) units for three (3)
years, provided that a minimum of twenty (20) credit units shall be earned in each
year.
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b. A registered professional shall be permanently exempted from CPE requirements


upon reaching the age of 60 years old.
c. A registered professional who is working abroad shall be temporarily exempted
from compliance with CPE requirement during his/her stay abroad, provided that
he/she is has been out of the country for at least one year immediately prior to the
date of renewal.
d. Those who failed to renew professional licenses for a period of five (5) continu-
ous years from initial registration, or from last renewal shall be declared delin-
quent.

Answer: d
26. Unless otherwise exempted, registered CPAs in the practice of accountancy who have
not completed the CPE requirements shall

a. Be dropped from the roster of CPAs.

b. Not be allowed to renew their professional licenses.


c. Present evidence to the satisfaction of the Board that they have the necessary
knowledge, skills and experience to discharge their professional responsibility.
d. Submit a letter addressed to the Board indicating the reasons for not complying
with the CPE requirements.
Answer: b
27. How many credit units per hour will be earned by a participant in a CPE seminar?

a. 1 CU per hour c. 3 CU per hour

b. 5 CU per hour d. 2 CU per hour

Answer: a
28. Who is not permitted by RA 9298 to practice public accountancy?
a. A general partnership.
b. A limited liability partnership.
c. A sole proprietorship.
d. A corporation, whose stockholders are all CPAs.
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Answer: d
29. According to RA 9298, if a partner in a two-member partnership dies, the surviving
partner may continue to practice as an individual under the existing firm title which in-
cludes the deceased partner's name.
a. For a period of time not to exceed five years.
b. For a period of time not to exceed two years.
c. Indefinitely.
d. Until the partnership pay-out to the deceased partner's estate is terminated.

Answer: d
30: A CPA shall not practice under a full name that includes or indicates the following,
except
a. Fictitious name
b. Specialization
c. Misleading as to the type of organization
d. Name(s) of past partner(s) in the firm name of the successor partnership.

Answer: d
31. Below are names of four CPA firms and pertinent facts relating to them. Unless oth-
erwise indicated, the individuals named are CPAs and partners and there are no other
partners. Which firm name and related facts indicate a violation of the Philippine Ac-
countancy Act of 2004?
a. Binhi, Binti and Bigti, CPAs (Bigti died about 5 years ago; Binhi and Binti are
continuing the firm.)
b. Tiu and Ramos, CPAs ( The name of R. Hermosilla, CPA, a third partner is omit-
ted from the firm name.)
c. Bitay and Bigo, CPAs (Bitay died about three years ago; Bigo is continuing the
firm as a sole practitioner.)

d. R. Hermosilla and Co., CPAs (R. Hermosa'a has ten other partners who are all
CPAs)
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Answer: c

32. CPAs, firms and partnerships of CPAs engaged in the practice of public accountancy
including partners and staff members thereof, shall register with the Commission and the
Board, such registration to be renewed every three years on or before
a. April 15 c. December 31
b. September 30 d. May 31

Answer: b
33. Which of the following is not one of the functions of the Board of Accountancy?
a. To supervise the registration, licensure and practice of accountancy in the Philip-
pines
b. To issue, suspend, revoke, or reinstate the certificate of registration for
the practice of the accountancy profession
c. To prescribe and/or adopt a code of ethics for the practice of accountancy
d. To adopt an official seal of the Commission.

Answer: d
34. The letters "CPA" shall be engraved in what part of the CPA's seal?

a. Upper portion of the space between the bigger and smaller circle.

b. Lower portion of the space between the bigger and smaller circle.

c. Left and right portion of the space between the bigger and smaller circle and in
the middle of the smaller circle.

d. Middle of the smaller circle.

Answer: d
35.Which of the following is not one of the functions of the Board of Accountancy as
specified in the RA 9298?
a. To look from time to time into the conditions affecting the practice of the ac-
countancy profession.
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b. To appoint members of the AASC r c

c. To investigate violations of RA 9298 and its IRRs.


d. To determine and prescribe minimum requirements leading to the admission of
candidates to the CPA examination.

Answer: b
36. A CPA certificate is evidence of
a. Independence as a professional.
b. Basic competence at the time of certification.
c. Membership in the accredited association.
d. Completion of continuing professional education program.

Answer: b
37. A certificate of accreditation shall be issued to certified public accountants in public
practice only upon showing, in accordance with rules and regulations promulgated by the
Board and approved by the Commission, that such registrant has acquired how many
years of meaningful experience in any of the areas of public practice?
a. One b. Two c. Three d. Four

Answer: c
38 and 39 are based on the following information:
38. and Co. CPAs, was approved on April 30, 2016; the registration shall expire on
a. September 30, 2018. c. April 30, 2019.
b. September 30, 2019. d. December 31, 2018

Answer: d
39. Which of the following is one of the reasons for not issuing a certificate of registra-
tion to a successful examinee? The individual:
a. Is of unsold mind.
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b. Had been guilty of immoral and dishonorable conduct.


c. Had been convicted by a court of a criminal offense involving moral turpitude.
d. All of the given choices.

Answer: a
40. A CPA whose certificate of registration has been revoked:

a. Can no longer be reinstated.


b. Is automatically reinstated as a CPA by the PRC after two years if he has acted in
an exemplary manner.
c. May be reinstated by the Professional Regulation Commission after two years if
he has acted in an exemplary manner.
d. May be reinstated as a CPA by the Board of Accountancy after two years if he has
acted in an exemplary manner.

Answer: d
41. A Professional Identification Card bearing the registration number, date of issuance,
expiry date, duly signed by the chairperson of the Commission, shall be issued to every
registrant renewable every
a. Two years b. Three years c. Four years d. Five
years

Answer: b
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AUDIT RELATED SERVICES


1. The degree of certainty that the practitioner has attained and wishes to convey is
called:

a. Assurance c. Audit risk

b. Precision d. Materiality
Answer: a
2. Which of the following is not included among the Auditing and Assurance Standards
Council (AASC) pronouncements?
a. Philippine Standards on Auditing
b. Philippine Standards on Review Engagements
c. Philippine Standards on Compilation Engagements
d. Philippine Standards on Related Services
Answer: c
3. According to AASC pronouncements, audit related services include:
a. Review c. Examination
b. Consultancy d. Compilation
Answer: d
4. Which of the following services is covered by AASC pronouncements?
a. Taxation c. Management Advisory
b. Consultancy d. Agreed-upon procedures
Answer: d
5. Which of the following services provides the highest level of assurance?
a. Audit c. Review
b. Agreed-upon procedures d. Compilation
Answer: a
6. When performing a review of financial statements, a CPA is required to
a. Apply analytical procedures and make inquiries from third by sending confirma-
tion letters.
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b. Assess the effectiveness of the client's accounting and internal control systems.
c. Obtain corroborative evidence to support management's responses to inquiries.
d. Obtain understanding of the client's business and industry.
Answer: d
7. Which of the following procedures is not included in a review engagement of .
a non-public entity? a. inquiries of management
b. inquiries regarding subsequent events
c. procedures designed to identify unusual fluctuations
d. studying and evaluating the client's internal control
Answer: d
8. The objective of an agreed upon-procedures engagement is for the auditor to:

a. Carry out procedures of an audit nature to which the auditor and the entity and
any appropriate third parties have agreed and to report on factual findings.

b. Carry out procedures of a review nature to which the auditor and the entity and
any appropriate third parties have agreed and to report on factual findings.
c. Carry out procedures of a review nature and to express limited assurance based on
those agreed procedures.

d. Carry out procedures of an audit nature and is express limited assurance.


Answer: a
9. A report on factual findings is the end product of the auditor when performing
a. Examination c. Review
b. Audit d. Agreed-upon procedures
Answer: d
10. Engagement to apply agreed-upon procedures on certain accounts within a financial
statement may be-accepted provided

a. The CPA has expressed opinion on the financial statements taken as a whole.
b. The CPA takes full responsibility for the adequacy of the procedures to be per-
formed.
c. The CPA provides only a limited assurance about the reliability of the financial
statements.
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d. The distribution of the report is limited only to specified parties involved.


Answer: d
11. A CPA may accept an engagement to apply agreed-upon procedures on specified el-
ement of financial statements provided
a. An audit of the financial statements taken as a whole is also performed.
b. The CPA will issue an opinion on the specified element.
c. An examination of the-specified element is also conducted.
d. The client takes full responsibility for the procedures to be performed.
Answer: d
12. Which of the following ethical principles does not apply to an agreed-upon procedure
engagement?
a. Independence
b. Confidentiality
c. Professional behavior.
d. Professional competence and due care.
Answer: a
13. What level of assurance does an accountant give on a compilation report?
a. None c. Low
b. Moderate d. High
Answer: a
14. Which of the following procedures would an accountant most likely perform in a
compilation engagement?
a. assemble financial information
b. apply analytical procedures
c. assess risk components
d. test the accounting records
Answer: a
15. The procedures employed in doing compilation are:
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a. Designed to enable the accountant to express a limited assurance

b. Designed to enable the accountant to express a negative assurance

c. Not designed to enable the accountant to express any form of assurance

d. Less extensive than review procedures but more extensive than agreed-upon pro-
cedures
Answer: c
16. Which of the following is incorrect about a compilation engagement?
a. The CPA uses his auditing expertise to collect, classify and summarize financial
information.

b. The engagement ordinarily entails reducing detailed data to a manageable and un-
derstandable form.

c. The CPA should exercise due care


d. The procedures performed do not enable the accountant to express any form of
assurance
Answer: a
17. What level of assurance does the CPA provide under the following engagements?
Agreed-upon
Audit Review procedure Compilation
a. High Moderate None None
b. High Limited Low None
c. Moderate Moderate None None
d. Reasonable Negative None Low
18. The use of negative assurance in audit reports on financial statements is
a. A violation of the professional standards.
b. Encouraged by PICPA
c. A help in clarifying the degree of responsibility being assumed by the auditor.
d. Properly located in the opinion paragraph of the unqualified report.
Answer: a
19. When an independent CPA is associated with the financial statements of a publicly
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held company but has not audited or reviewed the financial statements, the appropriate
form of report that must be issued must include
a. negative assurance c. disclaimer of opinion
b. compilation opinion d. explanatory paragraph
Answer: c
20. The statement that nothing came to our attention which would indicate that these
statements are not fairly presented expresses which of the following?
a. disclaimer of opinion c. negative confirmation
b. negative assurance d. adverse report
Answer: b
21. A CPA who is not independent may issue a
a. Review report
b. Special report
c. Report expressing a qualified opinion
d. Compilation report
Answer: d
22. A CPA should perform analytical procedures when engaged to
I Audit II Review III Compile
a. Yes, Yes, Yes c. No, Yes, No
b. Yes, Yes, No d. Yes, No, No
Answer: b
23. Auditors of public companies are often requested to report on interim financial state-
ments. A review of interim financial information consists primarily of
a. Vouching and tracing c. Inquires and analytical procedures
b. Reconciling and reforming d. Confirmation and observation
Answer: c
24. What level of assurance does an auditor provide in an engagement to perform agreed-
upon procedures?
a. High but not absolute assurance
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b. Limited assurance
c. Moderate assurance
d. No assurance
Answer: d
25. When an independent CPA assists in preparing the financial statements of a publicly
held entity, but has. not audited or reviewed them, the CPA should issue a disclaimer of
opinion. The CPA has no responsibility to apply any procedures beyond

a. Ascertaining whether the financial statements are in conformity with generally


accepted accounting principles

b. Determining whether management has elected to omit substantially all required


disclosures

c. Documenting that internal control is not being relied on.

d. Reading the financial statements for obvious mistakes in application of PFRS


Answer: b
26. Which of the following procedures is ordinarily performed by CPA in a review en-
gagement of a non-public entity?
a. Analytical procedures designed to test the accounting records by obtaining cor-
roborating evidential matter.
b. Inquiries concerning entity's procedures for recording and summarizing transac-
tions

c. Analytical review designed to evaluate the effectiveness of internal control


d. Inquiries from client's lawyers about pending litigation, claims and assessments.
Answer: b
27. In which of the following reports should an accountant not express negative or lim-
ited assurance?

a. A standard review report on financial statements of a nonpublic entity.

b. A standard compilation report on financial statements of a nonpublic entity

c. A standard comfort letter on financial information included in a registration


statement of a public entity

d. A standard review report on interim financial statements of a public entity


Answer: b
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OVERVIEW OF AUDITING
1. An audit of financial statements is conducted to determine if the

a. organization is operating efficiently and effectively


b. auditee is following specific procedures or rules set down by some higher author-
ity

c. overall financial statements are stated in accordance with specified criteria

d. auditee has complied with government laws and regulations


Answer: c
2. The subject matter of any audit consists of
a. Financial statements
b. Economic data
c. Assertions about economic actions and events
d. Operating data
Answer: c
3. The criteria for evaluating quantitative information vary. For example, in the audit of
historical financial statements by CPA firms, the criteria is usually
a. The Philippine Standards on Auditing
b. Financial reporting standards
c. Regulations of the Bureau of Internal Revenue
d. Regulations of the. Securities and Exchange Commission
Answer: b
4. Most of the independent auditor's work in formulating an opinion on financial state-
ments consists of
a. Studying and evaluating internal control
b. Obtaining and examining evidential matter
c. Examining cash transactions
d. Comparing recorded accountability with assets
Answer: b
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5. An audit that involves obtaining and evaluating evidence about the efficiency and ef-
fectiveness of an entity's operating activities in relation to specified objectives is a(n):
a. internal audit
b. external audit
c. operational audit
d. compliance audit
e. financial statement audit
Answer: c
6. An audit that involves obtaining and evaluating evidence in order to determine whether
certain financial or operating activities of an entity conform to specified conditions, rules,
or regulations is a(n):
a. internal audit
b. external audit
c. operational
d. compliance audit
e. financial statement audit
Answer: d
7. In financial statement audits, the ludit—proce; should conform with
a. Philippine Standards on Auditing c. The audit program
b. Financial reporting standards d. The auditor's judg-
ment.
Answer: a
8. Which of the following has the primary responsibility for the fairness of the represen-
tations made in the financial statements?
a. client's management c. Audit committee
b. Independent auditor d. Financial statements
9. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter. c. Audit report.
b. Management letter. d. Financial statements
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Answer: c
10. Which. of the following types of audit uses as its criteria laws and regulations?
a. Operational audit c. Compliance audit
b. Financial statement audit d. Performance audit
Answer: c
11. 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 a difficult to prepare financial statements that fairly present a company's finan-
cial position and changes in cash flows without the expertise of an independent
auditor.
b. It is management's responsibility to seek available independent aid in the apprais-
al of the financial information shown in its 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 all stockholders of a company receive an independ-
ent report on management's stewardship in managing the affairs of the business.
Answer: c
12. Which of the following types of auditing is performed most commonly by CPA's on a
contractual basis?
a. Internal auditing c. Income tax auditing
b. Government auditing d. External auditing
Answer: d
13. The primary purpose of an independent financial statement audit is to

a. provide a basis for assessing management's performance

b. comply with state regulatory requirements


c. assure management that the financial statements are unbiased and free from mate-
rial error
d. provide users with an unbiased opinion about the fairness of information reported
in the financial statements
Answer: d
14. Independent auditing can best be described as a
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a. subset of accounting
b. professional activity data attests to the fair presentation of financial statements
c. professional activity that measures and communicates financial accounting
data
d. regulatory activity that prevents the issuance of improper financial information
Answer: b
15. The reason an independent auditor gathers evidence is to
a. form an opinion on the financial statements
b. detect fraud
c. evaluate management
d. evaluate internal controls
Answer: a
16. The primary goal of the CPA in performing the attest function is to
a. Detect fraud.
b. Examine individual transactions so that the auditor may certify as to their validi-
ty.
c. Determine whether the client's assertions are fairly stated.
d. Assure the consistent application of correct accounting procedures.
Answer: c
17. Any service in which the CPA firm issues a written communication that expresses a
conclusion with respect to the reliability of a written assertion that is the responsibility of
another party is a(n)
a. accounting and bookkeeping service
b. attestation service
c. management advisory service
d. tax service
Answer: b
18. Which of the following criteria is unique to the auditor's attest function?
a. General competence
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b. Familiarity with the industry in which the client operates.


c. Due professional care
d. Independence
Answer: d
19. In general, internal auditors' independence will be greatest when they report directly
to 'the:
a. vice-president for finance
b. corporate controller
c. audit committee of the board of directors
d. corporate stockholders
Answer: c
20. The independent audit is important to readers of financial statement because it

a. Determine the future stewardship of the management of the company whose fi-
nancial statements are audited.

b. Measures and communicates financial and business data involved in financial


statements.

c. the objective examination of and reporting on management prepared statements.

d. Reports on the accuracy of 'all information in the , financial statements.


Answer: c
21. The primary reason for an audit by ;n independent, external audit firm is
a. To satisfy governmental regulatory to requirements.
b. To guarantee that there are no misstatements in the financial statements.
c. To provide increased assurance to users as to the fairness of the financial state-
ments.
d. To ensure that any fraud will be discovered.
Answer: c
22. Which one of the following is not among the conditions that give rise to a demand by
external users for independent audits of financial statements?
a. remoteness of users
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b. complexity of subject matter


c. the securities acts, administered by the SEC
d. potential conflict of interest between users and preparers of the statements
e. consequence for making decisions
Answer: c
23. Which of the following best describes the reason why an independent auditor reports
on financial statements?
a. A management fraud may exist and it is more likely to be detected by independent
auditors.
b. Different interests may exist between the company preparing the statements and
the persons using the statements.
c. A misstatement of account balances may 'exist and is generally corrected as the
result of the independent auditor's work.

d. A poorly designed Mternal control system may be in existence.


Answer: b
24. Which of the following statements does not describe a condition that creates a de-
mand for auditing?
a. Conflict between an information preparer and a user can result in biased infor-
mation.

b. Information can have substantial economic consequences for a decision-maker.

c. Expertise is often required for information preparation and verification

d. Users can directly assess the quality of information.


Answer: d
25. Which of the following statements does not properly describe a limitation of an au-
dit?

a. Many audit conclusions are made on the basis of examining a sample of evidence.
b. Some evidence supporting peso representation in the financial statements must be
obtained by oral or written representation of management.

c. Fatigue and carelessness can cause auditors to overlook pertinent evidence.


d. Many financial statement assertions cannot be audited.
25

Answer: d
26. Which of the following statements does not properly describe an element of theoreti-
cal framework of auditing?

a. The data to be audited can be verified


b. Short-term conflicts may exist between managers who prepare the data and audi-
tors who examine the data.

c. Auditors act on behalf of the management

d. An audit benefits the public


Answer: c
27. General purpose financial statements may be prepared in accordance with the follow-
ing framework except.

a. Generally accepted accounting principles in the Philippines.

b. Other authoritative and comprehensive bases of Accounting

c. Generally accepted auditing standards in the Philippines.

d. International accounting standard


Answer: c
28. The form of assurance issued when auditing financial statements

a. High

b. Negative

c. positive

d. Reasonable
Answer: c
29. The auditor's satisfaction as to the reliability of as assertion being made by one party
is called:

a. Assurance

b. Audit risk

c. Precision

d. Materiality level
Answer: a
26

30. Which of the following is not one of the reasons why absolute assurance can not be
attained when auditing financial statements?

a. The auditor does not examine all evidence available.

b. Most of the evidence gathered by the auditor is persuasive and not conclusive

c. Auditors may commit mistakes in the application of his judgment.

d. Many financial statement assertions can not be audited.


Answer: d
31. Which of the following is not one of the limitations of an audit?

a. the use of testing

b. error in the application of judgment

c. inherent limitation of internal control

d. scope limitations imposed by the entity


Answer: d
32. Which of the following is incorrect about responsibility (or financial statements?

a. Management is responsible for fair presentation of the financial statements.

b. Auditor is responsible for expressing an opinion on the financial statements

c. Audit of financial statements does not educe management's responsibility

d. Fair presentation of financial statements is an implicit part of the auditor's respon-


sibility.
Answer: c
27

PRE-ENGAGEMENT
1. Which of the following is the correct order of steps in the audit process?
A. Obtain understanding of the client's internal control
B. Perform tests of control
C. Obtain understanding of the client's business and its environment
D. Draft an audit report
E. Prepare a management letter
F. Prepare engagement letter G. Perform substantive tests

a. F, C, A, B, G, E, D
b. F,A,C,B,G,E,D

c. F, A, C, B, G, E, D

d. F, C, A, B, G, D, E
Answer: d
2. In making a decision to accept or continue with a client, the auditor should consider:
a b c
d
Its competence YES YES YES
YES
Its own independence YES NO YES
NO
Its ability to service the client properly YES YES YES
NO
The integrity of the client's management YES YES NO YES
Answer: a
3. Which of the following is not one of the reasons why auditor should perform prelimi-
nary engagement activities?
a. To ensure that the auditor maintains the necessary independence and ability to
perform the engagement.
b. To help ensure that there are no issues with management integrity that may affect
the auditor's willingness to continue the engagement.
28

c. To ensure that 'there is no misunderstanding with the client as to the terms of the
engagement.
d. To ensure that sufficient appropriate evidence will be obtained to support the au-
ditor's Opinion on the financial statements.
Answer: d
4. An auditor who accepts an audit engagement and does not possess the industry exper-
tise of the business entity should

a. Engage financial experts familiar with nature of the business entity

b. Obtain knowledge of matters that relate to the nature of the entity's business
c. Refer a substantial portion of the audit to another CPA who will act as the princi-
pal auditor

d. Inform the client that an unqualified opinion can not be expressed.


Answer: b
5. Preliminary knowledge about the client's business and industry must be obtained prior
to the acceptance of the engagement primarily to

a. Determine the degree of knowledge and expertise required by the engagement.

b. Determine the integrity of management.

c. Determine whether the firm is independent of the client.

d. Gather evidence about the fairness of the financial statements.


Answer: a
6. Which of the following factors most likely would cause an auditor not to accept a new
audit engagement?

a. An inadequate understanding of the entity's interval control structure

b. The close proximity to the end of the entity's fiscal year

c. Concluding that the entity's management probably lacks integrity


d. An inability to perform preliminary analytical procedures before assessing con-
trol risk
Answer: c
7. Which of the following factors most likely would influence an auditor's determination
of the auditability of the entity's financial statements?
29

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


Answer: c
8. Which of the following is not normally performed in the preplanning or pre-
engagement phase?

a. Deciding whether to accept or reject an audit engagement

b. Inquiring from predecessor auditor

c. Preparing an engagement letter

d. Obtaining management representation letter


Answer: d
9. The primary purpose of establishing quality control policies and procedures for decid-
ing 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 firm's duty to the public concerning the acceptance of new cli-
ents.
c. Minimize the likelihood of association with clients whose management lacks in-
tegrity.
d. Anticipate before performing any field work whether an unqualified opinion can
be expressed.
Answer: c
10. 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 au-
ditor 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.
c. Inquiry of third parties, such as the prospective client's bankers and attorneys
about information regarding the prospective client and its management.
d. Consideration of whether the internal control structure is sufficiently effective to
30

permit a reduction in the required substantive tests.


Answer: c
11. What is the most likely course of action that will be taken by an auditor in assessing
management integrity?

a. Tour the plant

b. Review the minutes of the board of directors

c. Research the background and histories of officers

d. Review bank reconciliation


Answer: c
12. An auditor who has been invited to submit a proposal for an audit engagement is a/an
a. predecessor auditor c. principal auditor
b. successor auditor d. interim auditor
Answer: b
13. What will an auditor who has been proposed for an audit engagement usually do prior
to accepting a new client?

a. Draft the financial statements of the client.


b. With the permission from the prospective client, contact the predecessor auditor
to determine if there are any disagreements between the client and the audit firms.
c. Obtain the potential client's permission to talk to the former auditor and review
work papers.

d. Prepare an audit engagement letter.


Answer: b
14. Where client is changing auditors, PSA requires communication between predecessor
and successor auditors. The burden of initiating the communication rest with the
a. Predecessor auditor
b. client
c. incoming auditor
d. SEC
Answer: c
31

15. Prior to the acceptance of an audit engagement with a client who has terminated the
services of the predecessor auditor, the CPA should
a. a. Contact the predecessor auditor without advising the prospective client and re-
quest a complete report of the circumstance leading to the termination with the
understanding that all information disclosed will be kept confidential.
b. b. Accept the engagement without contacting the predecessor auditor since the
CPA can include audit procedures to verify the reason given by the client for the
termination.

c. c. Not communicate with the predecessor auditor because this would in effect be
asking the auditor to violate the confidential relationship between the auditor and
client.

d. d. Advise the client of the intention to contact the predecessor auditor and request
permission for the contact.
Answer: d
16. When a CPA is approached to perform an audit for the first time, the CPA should
make inquires of the predecessor auditor. This is a necessary procedure because the pre-
decessor may be able to provide the successor with information that will assist the suc-
cessor in determining.

a. a. Whether he predecessor's work should be utilized

b. b. Whether the company follows the policy of rotating its auditors


c. c. Whether in the predecessor's opinion internal control of the company has been
satisfactory.

d. d. Whether the engagement should be accepted


Answer: d
17. When one auditor succeeds another, the successor auditor should request the
a. Client to instruct its attorney to send a letter of audit inquiry concerning the status
of the prior year's litigation, claims, and assessments.
b. Predecessor auditor to submit a list of internal accounting control weaknesses that
have not been corrected.
c. Client to authorize the predecessor auditor to allow a review of the predecessor
auditor's working papers.
d. Predecessor auditor to update the prior year's report to the date of the change of
auditors.
Answer: c
32

18. Which of the following will an auditor least likely discuss with the former auditors of
a potential client prior to acceptance?

a. Integrity of management

b. Fees charged for services

c. Disagreement with management regarding accounting principles

d. Reasons for changing audit firms


Answer: b
19. In an audit, communication between the predecessor and successor auditor should be

a. authorized in an engagement letter

b. acknowledged in a representation letter

c. either written or oral

d. written and included in the working papers


Answer: c
20. A successor auditor plans to communicate with the predecessor in connection with an
audit of prospective client's financial statements. Such communication is acceptable if

a. the client consents

b. the predecessor auditor consents

c. the client and predecessor auditor consent

d. the client and successor auditor consent


Answer: c
21. Upon discovering material misstatements in a client's financial statements that the
client would not revise, the auditor withdrew from the engagement. If asked by the suc-
cessor auditor about the termination the engagement, the predecessor auditor should

a. State that he found material misstatements that the client would not revise

b. Suggest that the successor ask the client

c. Suggest that the successor obtain the client's permission to discuss the reasons

d. Indicate that a misunderstanding occurred


Answer: c
22. Before accepting an audit engagement, a successor auditor should make specific in-
33

quiries of the predecessor auditor regarding the predecessor's


a. Opinion of any subsequent events occurring since the predecessor's audit report
was issued

b. Understanding as to the reasons for the change of auditors

c. Awareness of the consistency in the application of GAAP between periods

d. Evaluation of all matters of continuing accounting significance


Answer: b
23. A successor auditor most likely would make specific inquiries of the predecessor au-
ditor regarding

a. Specialized accounting principles of the client's industry

b. The competency of the client's internal audit staff.

c. The uncertainty inherent in applying sampling procedures.

d. Disagreements with management as to auditing procedures.


Answer: d
24. Which of the following should an auditor obtain from the predecessor auditor prior to
accepting an audit engagement?

a. Analysis of balance sheet accounts

b. Analysis of income statement accounts

c. All matters of continuing accounting significance

d. Facts that might bear on the on the integrity of management


Answer: d
25. What information should a successor auditor obtain during the inquiry of the prede-
cessor auditor prior to acceptance of the audit?
I. Facts that bear on the integrity of management
II. Understanding or-the client as to the reasons for change of auditors
III. Disagreement with management concerning auditing procedures
IV. The amount of misstatement which the auditor considers to be material to the
financial statements.
a. I and II b. I and III c. I and IV d. III and IV
34

Answer: b
26. According to PSA 210, the auditor and the client should agree on the terms of en-
gagement. The agreed terms would need to be recorded in

a. memorandum to be placed in the permanent section of the auditing working pa-


pers

b. engagement letter

c. client representation letter

d. comfort letter
Answer: b
27. Engagement letter that documents and confirms the auditor's acceptance of the en-
gagement would normally be sent to the client.

a. before the audit report is issued

b. after the audit report is issued

c. at the end of fieldwork

d. before the commencement of the engagement


Answer: d
28. An engagement letter should ordinarily include information on the objectives of the
engagement and
CPA's responsibilities Client's responsibilities Limitation of
engagement

a. Yes Yes Yes


b. Yes No Yes

c. Yes No No

d. No No No
Answer: a
29. The primary reason an engagement letter is obtained by audit firms prior to starting
the work is that

a. it clarifies the responsibilities of management and those of the auditor.


b. it defines the firm's policies and procedures regarding new clients.

c. it assures that all misstatements will be detected by the auditor.


35

d. it communicates the type of opinion that will be rendered on the engagement"


Answer: a
30. Which of the following best describes the purpose of the engagement letter?
a. The engagement letter relieves the auditor of some responsibility for the exercise
of due care.
b. By clearly defining the nature of the engagement, the engagement letter helps
avoid and resolve Misunderstandings between CPA and client regarding the pre-
cise nature of the work to be performed and the type of report to be issued.
c. The engagement letter informs the management of the detailed steps to be applied
in the audit process.
d. The engagement letter outlines the deficiencies in the client's business noted by
the auditor during the audit engagement.
Answer: b
31. Which of the following would be least likely to be included in the auditor's engage-
ment letter

a. Forms of the report

b. Extent of his responsibilities to his client

c. Objectives and scope of the audit

d. Type of opinion to be issued


Answer: d
32. An engagement letter would not normally include

a. billing arrangement

b. arrangement concerning client's assistance

c. details of the procedure that will be performed

d. expectation of receiving a representation letter from management


Answer: c
33. Arrangements concerning which of the following are least likely to be included in
engagement letter?

a. auditor's responsibilities
b. Fees and billing
36

c. CPA investment in client securities

d. Other forms of reports to be issued in addition to the audit report


Answer: c
34. The audit engagement letter should generally include a reference to 'each of the fol-
lowing except

a. The expectation of receiving a written management representation letter

b. A request for the client to confirm the terms of the engagement

c. A description of the auditor's method of sample selection

d. The risk that material misstatements may remain undiscovered.


Answer: c
35. After preliminary audit, arrangements have been made, an engagement confirmation
letter should be sent to the client. The letter usually would not include
a. A reference to the auditor's responsibility for the detection of errors or irregulari-
ties

b. An estimate of the time to be spent on the audit work by audit staff and manage-
ment

c. A statement that management advisory services would be made available upon


request
d. A statement that a management letter will be issued outlining comments and sug-
gestions as to any procedures requiring the client's attention
Answer: c
36. The use of an engagement letter is the best method of documenting
I. The required communication of significant deficiencies in internal control struc-
ture
II. Significantly lower materiality levels than those used in the prior audit
III. The description of any letters or reports that the auditor expects to issue
IV. Notification of any changes in the original arrangements of the audit
a. I and II b. I and IV c. II and III d. III and IV
Answer: d

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