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FUNDAMENTAL OF AUDITING AND ASSURANCE SERVICES

1.

The Philippine Framework for Assurance Engagements identifies two types of assurance
engagements a practitioner is permitted to perform: a reasonable assurance engagement
and limited assurance engagement. Which of the following is the objective of a reasonable
assurance engagement?
a. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a negative form of expression of the
practitioners conclusion.
b. A reduction in assurance engagement risk to a very low level in the circumstances of
the engagement as a basis for a disclaimer of the practitioners conclusion.
c. A reduction in assurance engagement risk to an acceptably low level in the
circumstances of the engagement as a basis for a positive form of expression of the
practitioners conclusion.
d. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a qualified form of expression of the
practitioners conclusion.

2.

Which of the following engagements is covered by the Framework for Assurance


Engagements?
a.
b.
c.
d.

3.

The following are the elements of an assurance engagement except


a.
b.
c.
d.

4.

Suitable criteria
An appropriate subject matter
A two-party relationship involving a practitioner and intended users
Sufficient appropriate evidence

Which of the following is not an assurance engagement?


a.
b.
c.
d.

5.

Consulting Engagements
Preparation of Tax Returns
Independent Financial Statement Audit
Agreed-upon procedures Engagement

Compilation
Financial statements audit
Information reliability services
Reviews of prospective financial statements

The risk that the practitioner expresses an inappropriate conclusion when the subject
matter information is materially misstated
a. Assurance engagement risk

b. Materiality risk
c. Non-detection risk
d. Reasonable assurance risk
6.

Which of the following is not an element of an assurance engagement?


a.
b.
c.
d.

7.

Which of the following characteristics need not be exhibited in determining the identified
suitability of criteria of a subject matter in an assurance engagement?
a.
b.
c.
d.

8.

An appropriate subject matter


Suitable criteria
Sufficient appropriate evidence
Substantial engagement fee

Completeness
Relevance
Understandability
Substantial acquisition cost

An attitude of professional skepticism means that the practitioner


a. Should assess critically with questioning mind the validity of evidence obtained
b. Should recognize that circumstances may exist that can cause the subject matter
information to be materially misstated
c. Is alert of evidence that contradicts or brings into question the reliability of documents
or representations by the responsible party
d. Is expected to eliminate the risk of overlooking suspicious circumstances, of over
generalizing when drawing conclusions from observations and of using faulty
assumptions in determining the nature, timing and extent of evidence gathering
procedures and evaluating the results thereof

9.

Independent auditing can best be described as a


a. Branch of accounting
b. Discipline that attests to the results of accounting and other functional operations and
data
c. Professional activity that measures and communicates financial and business data
d. Regulatory function that prevents the issuance of improper financial information

10.

Non-assurance engagements include of all of the following except


a.
b.
c.
d.

Agreed-upon procedures
Management consulting
Preparation of tax returns where no conclusion is expressed
Compliance audit

11.

The independent audit is important to readers of financial statements because it


a. Determines the future stewardship of the management of the company whose financial
statements are audited
b. Measures and communicates financial and business data included in financial
statements
c. Involves the objective audit of and reporting on management-prepared statements
d. Reports on the accuracy of all information in the financial statements

12.

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, cash flow, and operations without the expertise of an independent auditor
b. It is managements responsibility to seek available independent aid in the appraisal 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 independent
report on managements stewardship in managing the affairs of the business

13.

When a CPA expresses an opinion on financial statements, his or her responsibility


extend to
a. The underlying wisdom of the clients management decisions
b. Whether the results of the clients operating decisions are fairly presented in the
financial statements
c. Active participation in the implementation of the advice given to the client
d. An ongoing responsibility for the clients solvency

14.

The Philippine Framework for Assurance Engagements identifies two types of assurance
engagements a practitioner is permitted to perform: a reasonable assurance engagement
and a limited assurance engagement. Which of the following is the objective of a limited
assurance engagement?
a. A reduction in assurance engagement risk to a very low level in the circumstances of
the engagement as a basis for a disclaimer of the practitioners conclusion.
b. A reduction in assurance engagement risk to an acceptably low level in the
circumstances of the engagement as a basis for a positive form of expression of the
practitioners conclusion
c. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a negative form of expression of the
practitioners conclusion
d. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a qualified form of expression of the
practitioners conclusion

15.

The subject matter of an assurance engagement can take the following forms except
a.
b.
c.
d.

16.

The primary responsibility for the adequacy of disclosure in the financial statements of a
publicly held company rests with the
a.
b.
c.
d.

17.

International auditing standards


Financial reporting standards
Regulations of the BIR
Regulations of the SEC

The process of recording, classifying, and summarizing economic events in a logical


manner for the purpose of providing financial information for decision-making is
a.
b.
c.
d.

20.

Clients management
Independent auditor
Audit committee
PICPA

The criteria for evaluating quantitative information vary. Example, in the audit of historical
financial statements by CPA firms, the criteria are usually
a.
b.
c.
d.

19.

Partner assigned to the audit engagement


Management of the company
Auditor in charge of the field work
Securities and Exchange Commission

Which of the following is responsible for the fairness of the representations made in
financial statements?
a.
b.
c.
d.

18.

Historical or Prospective financial statements


Performance of an entity that could indicate efficiency and effectiveness
The entitys internal control
Evaluation of a capital investment proposal

Accounting
Auditing
Management
Economics

An audit independence issue might be raised by the auditors participation in


management advisory services engagements. Which of the following statements is most
consistent with the professions attitude toward this issue?
a. Information obtained as a result of a management advisory services engagement is
confidential to that specific engagement and should not influence performance of the
attest function

b. The decision as to loss of independence must be made by the client based upon facts
of the particular case
c. The auditor should not make management decisions for an audit client
d. The auditor who is asked to review management decisions is also competent to make
these decisions and can do so without loss of independence
21.

This refers to the audit procedures that, in the auditors judgment and based on the PSAs
are deemed appropriate in the circumstances to achieve the objective of an audit
a.
b.
c.
d.

22.

Which of the following is not an assurance engagement?


a.
b.
c.
d.

23.

General competence
Familiarity with the particular industry of which the auditors client is part
Due professional care
Independence

Which of the following may not be an appropriate form of the subject matter of an
assurance engagement?
a.
b.
c.
d.

26.

A subject matter
Suitable criteria
An engagement process
Appropriate professional fees

Which of the following criteria is unique to the auditors attest function


a.
b.
c.
d.

25.

Information System Reliability Service


Business Performance Measurement
Risk Assessment Service
Management Consulting Service

Assurance engagements should exhibit the following elements except


a.
b.
c.
d.

24.

Analytical procedures
Scope of an audit
Audit sampling
Documentation

Historical financial information


Systems and processes
Behavior
Non-physical characteristics of a facility

Which of the following is not an appropriate component of an engagement risk?

a.
b.
c.
d.
27.

Auditing is based on the assumption that financial data and statements are
a.
b.
c.
d.

28.

Control risk
Inherent risk
Business risk
Detection risk

In conformity with appropriate criteria


Verifiable
Presented fairly
Consistently applied

The primary reason why a CPA firm establishes quality control policies and procedures for
human resources is to
a. Comply with the continuing educational requirements imposed for all staff accountants
in CPA firms
b. Establish in fact as well as in appearance that staff accountants are increasing their
knowledge of accounting and auditing matters
c. Provide a forum for staff accountants to exchange their experiences and views
concerning firm policies and procedures
d. Provide reasonable assurance that staff personnel will have the capability,
competence and commitment to ethical principles required to enable them to fulfill their
responsibilities in accordance with professional standards and regulatory and legal
requirements

29.

In pursuing its quality control objectives with respect to assigning personnel to


engagements, a CPA firm may use policies and procedures such as the following
a. Rotating employees from assignment to assignment on a random basis to aid in the
staff training effort
b. Requiring timely identification of the staff requirements of specific engagements so that
enough qualified personnel can be made available
c. Allowing staff to select the assignments of their choice to promote better client
relationships
d. Assigning a number of employees to each engagement in excess of the number
required so as not to overburden the staff and interfere with the quality of the audit
work performed

30.

The accounting firm should establish policies and procedures assigned to promote an
internal culture based on the recognition that quality is essential in performing
engagements. This may be communicated through the following means except
a.
b.
c.
d.

Training seminars
Formal and informal dialogue
Publication in PICPA newsletter
Mission statements

31.

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

32.

Make inquiries of the proposed clients legal counsel


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

A CPA establishes quality control policies and procedures for deciding whether to accept
or continue a client. The primary purpose for establishing such policies and procedures is
to
a. Enable the auditor to attest to the integrity or reliability of a client
b. Comply with the quality control standards established by the regulatory bodies
c. Lessen the exposure to litigation resulting from failure to detect irregularities in client
financial statements
d. Minimize the likelihood of association with clients whose managements lack integrity

33.

In pursuing its quality control objectives with respect to independence, a CPA firm may
use policies and procedures such as the following except
a. Emphasizing independence in mental attitude in firm training programs and in
supervision and review of work
b. Prohibiting employees from owning shares of the stock of publicly traded companies
c. Suggesting that employees conduct their banking transactions with banks that do not
maintain accounts with client firms
d. Assigning employees who may lack independence to research positions that do not
require participation in the field audit work

34.

Engagement risk is influenced by the risks associated with the following except
a.
b.
c.
d.

35.

Which of the following is not an element of quality control that should be considered by a
firm of independent auditors?
a.
b.
c.
d.

36.

Nature and form of the subject matter


Nature and form of the criteria applied to the subject matter
Nature and extent of the process used to collect and evaluate evidence
Unreasonably low professional fee

Assigning personnel to engagements


Consultation with appropriate persons
Keeping records of quality control policies and procedures
Supervision

A practitioner should plan and conduct the assurance engagement in an effective manner
to meet the objective of the engagement. Which of the following matters need not be a

concern of the practitioner in planning the work?


a.
b.
c.
d.
37.

A firm of CPAs may use policies and procedures such as notifying professional personnel
as to the names of audit clients having publicly held securities and confirming periodically
with such personnel that prohibited relations do not exist. This is done to achieve effective
quality control in which of the following areas?
a.
b.
c.
d.

38.

Relevance
Neutrality
Reliability
Sufficiency

A CPA establishes quality control procedures for deciding whether to accept a new client
or to continue to perform services for a current client. The primary purpose for establishing
such policies and procedures is to
a.
b.
c.
d.

40.

Acceptance and continuance of clients


Human resources
Ethical requirements
Leadership responsibilities for quality within the firm

The decision of whether the criteria are suitable involves considering whether the subject
matter of the assurance engagement is capable of reasonably consistent evaluation or
measurement using such criteria. Which of the following characteristics is not considered
necessary in determining whether the criteria are suitable?
a.
b.
c.
d.

39.

Criteria to be used
Engagement objective
Personnel and expertise requirements
Specific format of the assurance report

Comply with financial reporting standards


Comply with the quality control standards established by the regulatory bodies
Comply with standards of auditing
Minimize the likelihood of association with clients whose management lacks integrity

The accounting firm should establish accounting policies and procedures designed to
provide it with reasonable assurance that the firm and its personnel comply with relevant
ethical requirements. Which of the following is not among the fundamental principles of
professional ethical requirements relating to assurance and related services?
a.
b.
c.
d.

Integrity
Objectivity
Professional competence and due care
Maximization of wealth

41.

An operational audit differs in many ways from an audit of financial statements. Which of
the following is the best example of one of these differences?
a. The usual audit of financial statements covers the four basic statements, whereas the
operational audit is usually limited to either the balance sheet or the income statement
b. The boundaries of an operational audit are often drawn from an organization chart and
are not limited to a single accounting period
c. Operational audits do not ordinarily result in the preparation of a report
d. The operational audit deals with pre-tax income

42.

The review of a companys financial statements by a CPA firm:


a.
b.
c.
d.

43.

Operational auditing is primarily oriented toward:


a.
b.
c.
d.

44.

Determine whether the financial statements fairly present the entitys operations
Evaluate the feasibility of attaining the entitys operational objectives
Make recommendations for improving future performance
Report on the entitys relative success in attaining profit maximization

A review of any part of an organizations procedures and methods for the purpose of
evaluating efficiency and effectiveness is classified as a(n)
a.
b.
c.
d.

46.

Future improvements to accomplish the goals of management


The accuracy of data reflected in managements financial records
The verification that a companys financial statements are fairly presented
Past protection provided by existing internal control

A typical objective of an operational audit is for the auditor to:


a.
b.
c.
d.

45.

Is substantially less in scope of procedures than audit


Requires detailed analysis of the major accounts
Is of similar scope as an audit and adds similar credibility to the statements
Culminates an issuance of report expressing the CPAs opinion as to fairness of the
statements

Audit of financial statements


Compliance audit
Operational audit
Production audit

An audit to determine whether the auditee is following specific procedures or rules set
down by some higher authority is classified as a(n)
a. Audit of financial statements
b. Compliance audit
c. Operational audit

d. Production audit
47.

The primary reason for an audit by an independent, external audit firm is to


a. Satisfy governmental regulatory requirements
b. Guarantee that there are no misstatements in the financial statements and ensure that
any fraud will be discovered
c. Relieve management of responsibility for the financial statements
d. Provide increased assurance to users as to the fairness of the financial statements

48.

Which of the following attributes is more closely associated with assurance services
performed by a CPA firm than with other lines of professional work?
a.
b.
c.
d.

49.

Which of the following types of management advisory services may not be performed by a
CPA firm that wants to maintain its independence with respect to the client?
a.
b.
c.
d.

50.

Training employees
Making recommendations for improvements in internal control
Screening and interviewing applicants for a new accounting position
Supervising computer employees

In pursuing its quality control objectives, a CPA firm may maintain records indicating which
of its partners or employees were previously employed by its clients. Which quality control
element would this be most likely to satisfy?
a.
b.
c.
d.

51.

Integrity
Competence
Independence
Keeping informed in current professional developments

Leadership responsibilities for quality within the firm


Human resources
Ethical requirements
Engagement performance

In determining the scope and nature of services to be performed in public practice, a CPA
firm should:
a. Require independence for all services performed
b. Determine that the performance of all services is consistent with the firms members
role as professionals
c. Have in place internal control procedures
d. Only perform accounting related services

52.

Error that arises from an isolated event that has not recurred other than or specifically

identifiable occasions and is therefore not representative of errors in the population


a.
b.
c.
d.
53.

A government audit evaluates a disbursement to determine if it is necessary, excessive or


extravagant in accordance with existing rules and regulations. What kind of audit is he
coming?

a.
b.
c.
d.

54.

Most audit evidence is persuasive rather than conclusive


Use of testing
Accounting and internal control system limitation
Incompetence of an auditor

Economic and efficient use of resources


Effective achievement of business objectives
Attesting to the fairness of the financial statements
Compliance with company policies

Which of the following is not one of the concepts in the framework of auditing theory
a.
b.
c.
d.

57.

Economy Audit
No
Yes
Yes
No

Operational auditing refers to the study of business operations for the purpose of making
recommendations for all of the following except
a.
b.
c.
d.

56.

Compliance Audit
Yes
No
Yes
No

Inherent limitations in an audit stem from the following factors except


a.
b.
c.
d.

55.

Expected error
Anomalous error
Sampling error
Unintentional error

Ethical conduct
Conflict of interest
Evidence
Fair presentation

The forecast projection standards do not require


a. A caveat that the prospective results may not be achieved
b. A statement that examination was made in accordance with standards established by
the ASC
c. An opinion on the prospective financial statement
d. A statement that the accountant should be independent

58.

Internal auditors role in preventing and detecting fraud would not include the
a.
b.
c.
d.

59.

A CPA examines the financial statements of a local bank. According to the Code of Ethics,
the appearance of independence ordinarily would not be impaired if the CPA
a.
b.
c.
d.

60.

Audit of abnormal expenditures


Audit of sensitive expenses such as foreign sale expenses
Review of the companys policies regarding questionable payments
Direct responsibility of reporting fraud to the SEC

Serves on the banks committee that approves loans


Owns several of the banks ordinary shares
Obtains a short-term loan from the bank
Uses the banks timesharing computer service to solve client-related problems

A CPA should not undertake a management advisory service engagement that includes
continued participation through implementation, unless
a. Upon implementation of a new study and evaluation of the system of internal control is
performed
b. Upon implementation, the clients personnel will have the knowledge and ability to
adequately maintain and operate such systems as may be involved
c. The CPA accepts overall responsibility for implementation of the chosen course of
action
d. The CPA acquires an overall knowledge of the clients business that is equivalent to
that possessed by management

61.

Santos, a CPA not in public practice, is an employee in the internal audit department of
Towers Company. The management has asked Santos to perform examinations of
potential acquisitions and to express an opinion thereon. Santos will use the reports for
internal purposes and to show to its bankers in accordance with certain loan agreements.
How should Santos sign the report?
a.
b.
c.
d.

62.

Santos, CPA
Santos, Internal Auditor
Santos, CPA (Internal Auditor)
Santos, Internal Auditor (CPA)

An auditor should not render a report on


a.
b.
c.
d.

The achievability of forecasts


Client internal control
Management performance
Quarterly financial information

63.

The CPA in public practice violates the Code of Ethics for Professional Accountants if he
accepts a fee which was
a.
b.
c.
d.

64.

Fixed by a public authority


Determined, based on the results of judicial proceedings
Payable after a specified finding was obtained
Based on the actual audit time charges

Contingent fees charged by CPAs engaged in tax practice are permitted under the rules of
professional conduct because
a. This practice establishes fees which are commensurate with the value of the services
b. Attorneys in tax practice customarily set contingent fees
c. Determination by taxing authorities are a matter of judicial proceedings which do not
involve third parties
d. The consequences are based upon findings of judicial proceedings or the findings of
tax authorities

65.

A CPA accepts an engagement for a professional service without violating the rules of
Professional Conduct if the service involves
a. The preparation of cost projections for submission to a government agency as an
application for a rate increase, and the fee will be paid if there is a rate increase
b. Tax preparation, and the fee will be based on whether the CPA signs the tax return
prepared
c. A litigatory, and the fee is not known but it is to be determined by a district court
d. Tax return preparation and the fee is to be based on the amount of taxes saved

66.

The Code of Ethics provides that when a CPA is required to express an opinion on
combined or consolidated financial statements which include a subsidiary, branch, or
other component audited by another independent public accountant, the CPA may

a. Insist on auditing any such component which the CPA deems necessary to warrant the
expression of an opinion
b. Insist only on performing a review of any such component
c. Not insist on auditing any such component but may request copies of all working
papers relevant to the other independent public accountants examinations
d. Not insist on auditing any such component or reviewing working papers belonging to
the other independent public accountant
67.

Which of the following act when committed by a CPA constitute a violation of the Code of
Ethics:
a. Rendering management services to a non-audit client
b. Offering a position with higher salary to a staff member of another CPA
c. Charging professional fee on the savings gained by a client on a tax case

d. Providing accounting service to a non-audit client


68.

An auditing firm is allowed to offer employment to an employee of another CPA in a


public practice if the CPA
a.
b.
c.
d.

69.

The CPA should not


a.
b.
c.
d.

70.

Advertise only as to his expertise in preparing income tax returns


Base his audit fee on a percentage of the proceeds of his clients stock issue
Own preferred stock in a corporation which is an audit client
Perform an examination for a financially distressed client at less than his customary
fees

Which of the following is allowable under the rules against advertising?


a.
b.
c.
d.

72.

Render management consulting services to an audit client


Accept a position with another firm without informing his present employer
Advise clients and professional contacts of the opening of a new office
Describe himself as tax expert or management consulting specialist

Ethically, the auditor could


a.
b.
c.
d.

71.

Inform the other CPA in public practice prior to making the offer
Makes the offer verbally to an employee who is not a CPA
Makes the offer on behalf of an audit client
Has an executive search staff that is involved in personal placement

A news item relating to a technical paper read by a CPA at a seminar


A bold listing of the CPAs name and address in a telephone directory
An announcement as to the expertise in providing taxation services by the CPA
A letter to trade chamber offering audit services at reduced group rates

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 Code of Ethics?
a. Names and addresses, telephone numbers, number of partners, office hours, foreign
language competence, and date the firm was established
b. Services offered
c. Educational and professional attainments, including date and place of certification,
degrees received, and membership in professional associations
d. Names, addresses and telephone numbers of the firms clients, including the number
of years served

PROFESSIONAL PRACTICE OF PUBLIC ACCOUNTING


1.

PAS 120, Framework of Philippine Standards on Auditing describes the framework within
which Philippine Standards on Auditing (PSAs) are issued in relation to the services which
may be performed by auditors. It requires that financial statements need to be prepared in
accordance with one, or a combination of the following except:
a. International Accounting Standards
b. Accounting standards generally accepted in the Philippines
c. Other authoritative and comprehensive financial reporting framework designed for use
in financial reporting and identified in the financial statements
d. Procedures recommended by the industry association of accountants

2.

Which of the following services of a professional accountant is considered to provide


moderate level of assurance that information subject to review is free of material
misstatement?

a. a.
b.
c.
d.
3.

Which of the following is not among the ethical principles governing the auditors
professional responsibilities?
a.
b.
c.
d.

4.

Independence
Integrity
Objectivity
Size and profile of clientele

An audit has inherent limitations that affect the auditors ability to detect material
misstatements. Which of the following is not among the factors that result to these
inherent limitations?
a.
b.
c.
d.

5.

Audit
Agreed-upon procedures
Review
Compilation

Use of testing
Inherent limitations of accounting and internal control system
Evidence are basically persuasive rather than conclusive
Physical limitations of auditors due to fatigue and stress

A process comprising an ongoing consideration and evaluation of the firms system of


quality control including a periodic inspection of a selection of completed engagements
designed to provide the firm with reasonable assurance that its system of quality control is
operating effectively
a. Quality assurance review
b. Monitoring
c. Documenting

d. Auditing
6.

Which of the following does a firm need not establish and maintain a system of quality
control for?
a.
b.
c.
d.

7.

________________ refers to application of relevant training, knowledge and experience,


within the context provided by auditing, accounting and ethical standards in making
informed decisions about the courses of action that are appropriate in the circumstances
of the audit engagement
a.
b.
c.
d.

8.

Nature of the entity


Nature of the financial statements
Whatever laws or regulation prescribes the applicable financial reporting framework
Size of the entity

Which of the following factors will not influence the decision of an auditor of a parent entity
who is also the auditor of a component whether to send a separate audit engagement
letter to the component?
a.
b.
c.
d.

10.

Professional judgment
Reasonable assurance
Professional skepticism
Compliance

Which of the following is not among the factors that are relevant to the auditors
determination of the acceptability of the financial reporting framework to be applied in the
preparation of the financial statements?
a.
b.
c.
d.

9.

Leadership responsibilities for quality within the firm


Relevant ethical requirements
Maximizing revenue
Engagement performance

Whether a separate auditors report is to be issued on the component


Legal requirements in relation to audit appointments
Degree of ownership of parent
The fee to be paid by the parent entity

When evaluating the appropriate competence and capabilities expected of the


engagement team as a whole, the engagement partner may take the following into
consideration except
a. The teams understanding and practical experience with audit engagements of a
similar nature and complexity through appropriate timing and participation
b. The teams technical experience
c. The teams knowledge of relevant industries in which the client operates

d. The teams average cumulative age and length of service to the firm
11.

Audit documentation serves the following services except


a.
b.
c.
d.

12.

Assisting the engagement team to plan and perform the audit


Computing the fee to be billed the client
Enabling the engagement team to be accountable for its work
Assisting members of the engagement team responsible for supervision to direct and
supervise the audit work

The auditor shall prepare audit documentation that is sufficient to enable an experienced
auditor having now previous connection with the audit, achieve the following except
a. To understand the nature, timing and extent of the audit procedures performed to
comply with the PSAs and applicable legal regulatory requirement
b. To estimate the amount of audit revenue earned corresponding to the bulk of working
papers prepared
c. To understand the results of the audit procedure performed and the audit evidence
obtained
d. To appreciate significant matters arising during the audit, the conclusions reached
thereon and significant professional judgment made in reaching those conclusions

13.

In documenting the nature, timing and extent of audit procedure performed, the auditor
shall record the following except
a.
b.
c.
d.

14.

The identifying characteristics of the specific items or matters tested


Who performed the audit work as well as the date such work was completed
Who reviewed the audit work performed and the date and extent of such review
The time charges in performing the procedure as well as the corresponding audit
revenue generated

Professional skepticism can be described as any of the following except


a. Expertise in the authentication of documents examined
b. An attitude that includes a questioning mind and a criteria assessment of audit
evidence
c. Conducting ongoing questioning of whether the information and audit evidence
suggests that a material misstatement due to fraud may exist
d. Using the work of an expert to assess the document authenticity

15.

When auditor suspects material misstatement in the financial statements resulting from
management fraud, he/she may direct inquiries from the following personnel within the
entity except
a. In-house legal counsel
b. Chief ethics officer of equivalent person

c. Operating personnel not directly involved in the financial reporting process


d. Top executives who initiated, approved and authorized recording of complex and
unusual transactions
16.

Which of the following is not considered among the Fraud risk factors?
a.
b.
c.
d.

17.

The need to meet expectations of third parties to obtain additional equity financing
The granting of significant bonuses if unrealistic profit targets are met
Ineffective control environment
The existence and enforcement of a written code of conduct

Which of the following unusual relationships between the auditor and manager would not
necessarily indicate possibility of fraud?
a. Denial of access to records, facilitate certain employees, vendors or customers or
others from whom audit evidence might be sought
b. Undue time pressures imposed by management to resolve complex or contentious
issues
c. Unusual delays by the entity in providing requested information
d. Willing by management to permit the auditor to meet privately with those charged with
governance

18.

Which of the following is not among the business risks that management faces relation to
the entitys e-commerce activities?
a. Loss of transaction integrity which may be compounded by the lack of an adequate
audit trail in either paper or electronic form
b. Non-compliance with taxation and other legal and regulatory requirements particularly
when internet/e-commerce transactions are conducted across international boundaries
c. Failure to ensure that contracts evidenced only by electronic means are binding
d. Under-reliance on e-commerce when placing significant business systems or other
business transactions on the internet

19.

This refers to an approximation of the amount of an item in the absence of a precise


means of measurement
a.
b.
c.
d.

20.

Projection
Forecast
Probable amount
Accounting estimate

The term that describes the role of persons entrusted with the supervision, control and
direction of an entity is
a. Management
b. Administration

c. Governance
d. Government
21.

The term that refers to acts of omission or commission by the entity being audited, either
intentional or unintentional which are contrary to the prevailing laws or regulations
a.
b.
c.
d.

22.

This refers to the financial information based on assumptions about events that may
occur in the future and possible actions by an entity
a.
b.
c.
d.

23.

Projected data
Prospective financial information
Accounting estimates
Budget

This refers to the audit procedures deemed necessary in the circumstances deemed
necessary to achieve the objective of the audit
a.
b.
c.
d.

24.

Error
Noncompliance
Fraud
Misstatement

Compliance audit procedures


Substantive audit procedures
Scope of an audit
Analytical procedures

A special purpose auditors report is issued in connection with the independent audit of the
following financial information except
a. Financial statements prepared in accordance with a comprehensive basis of
accounting
b. Specified accounts, elements of accounts or items in a financial statement
c. Compliance with contractual agreements
d. Financial statements prepared in accordance with IFRS

25.

The objective of the ordinary examination by the independent auditor is the expression of
an opinion on
a.
b.
c.
d.

26.

The fairness of the financial statements


The accuracy of the financial statements
The accuracy of the annual report
The balance sheet and income statement

The reason auditors accumulate evidence is to

a.
b.
c.
d.

27.

In distinguishing between the management of a material management fraud and an


equally material error, audits
a.
b.
c.
d.

28.

Should provide complete assurance of detection


Should be expected to provide the same degree of assurance
Cannot be expressed to provide the same degree of assurance
Provide no assurance of detecting either

Which of the following is not one of the seven broad categories of financial statement
assertions, as classified in Glossary of Terms?
a.
b.
c.
d.

29.

Defend themselves in the event of a lawsuit


Justify the conclusions they have otherwise reached
Satisfy the requirements of the Securities Act
Enable them to reach conclusions about the fairness of the financial statements and
issue an appropriate audit report

General or specific transaction objectives


Existence
Valuation
Presentation and disclosure

Which of the following statements is not correct?


a. It would be a violation of the completeness assertion if management would record a
sale that did not take place
b. The completeness assertion deals with matters opposite from those of the
existence/occurrence assertion
c. The completeness assertion is concerned with the possibility of omitting items from the
financial statements that should have been included
d. The existence/occurrence is concerned with inclusion of amounts that should have not
been

30.

While performing services for their clients, professionals have a duty to provide a level of
care which is
a.
b.
c.
d.

31.

Free from judgment errors


Superior
Greater than average
reasonable

An arrangement which offers the injured party a potential gain when the lawsuit is
successful but minimal loss when it is unsuccessful is
a. the public defenders office

b. the contingent-fee basis


c. no-fault insurance
d. liability assurance
32.

When the auditor issues an erroneous opinion as the result of an underlying failure to
comply with the requirements of standards on auditing, it results in
a.
b.
c.
d.

33.

business failure
audit failure
audit risk
all of the above

In connection with the examination of financial statements, an independent auditor could


be responsible for failure to detect a material fraud if
a. statistical sampling techniques were not used on the audit engagement
b. the auditor planned the work in a hasty and inefficient manner
c. accountants performing important parts of the work failed to discover a close
relationship between the treasurer and the cashier
d. the fraud was perpetrated by one client employee, who circumvented the existing
internal controls

34.

Most accounting and auditing professionals agree that when an audit has failed to uncover
material misstatements, and the wrong type of audit opinion is issued, the audit firm
a.
b.
c.
d.

35.

In the auditing environment, failure to meet the standards on auditing is often


a.
b.
c.
d.

36.

has failed to follow the standards on auditing


deserves to lose the lawsuit
should be asked to defend the quality of the audit
should not be held responsible for the financial loss suffered by others

an accepted practice
a suggestion of negligence
conclusive evidence of negligence
tantamount to criminal behavior

A common way for a CPA firm to demonstrate its defense of a lack of duty to perform is by
use of a(n)
a.
b.
c.
d.

expert witness testimony


engagement letter
letter of representation
confirmation letter

37.

The criteria by which the quality of performance of auditing engagements are measured.
This indicates levels of performance which must be attained for the completion of a
satisfactory audit and these relate to the personal qualifications of the auditor and the
exercise of his judgment in performing the examination and in rendering his report. These
are called the
a. Statement of Financial Accounting Standards (SFAS)/ International Accounting
Standards (IAS)
b. Philippine Standards on Auditing (PSA)
c. Cost standards
d. Standards of reporting

38.

Philippine Standards on Auditing (PSAs) is best described to mean


a.
b.
c.
d.

39.

Acts to be performed by the auditor


Measures of the quality of the auditors performance
Procedures to be used to gather evidence to support financial statements
Audit objectives generally determined on audit engagements

Choose one of the following which would describe best the phrase Philippine Standards
on Auditing
a. They identify the policies and procedures for the conduct of the audit
b. They define the nature and extent of the auditors responsibilities
c. They provide guidance to the auditor with respect to planning the audit and writing the
audit report
d. They set forth a measure of the quality of the performance of audit procedures

40.

The PSAs established by the Board of Accountancy apply


a.
b.
c.
d.

41.

only to the PICPA membership


to all CPAs
only to those who choose to follow them
only when conducting audits subject to the Boards jurisdiction

On every audit engagement, the CPA should comply with applicable PSA
a. without exception
b. except in examinations that result in a qualified report
c. except in engagements where the CPA is associated with unaudited financial
statements
d. except in examinations of interim financial statements

42.

Professional experience is an important aspect of the training and proficiency of the junior
assistant just entering upon an auditing career. Professional experience should be
obtained

a.
b.
c.
d.
43.

with proper supervision and review of work by a more experienced supervisor


through a thorough study of the PSAs
by completing a number of continuing education courses each year
by taking appropriate professional certification exams

An auditor in accepting an audit engagement wherein he does not possess the industry
expertise of the business entity, should
a. engage financial experts familiar with the nature of the business entity
b. obtain a knowledge of matters that relate to the nature of the entitys business
c. refer substantial portion of the audit to another CPA who will act as the principal
auditor
d. first inform management that an unqualified opinion cannot be issued

44.

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.
b.
c.
d.

45.

Juan dela Cruz, CPA, accepted the audit engagement of XYZ Corporation. During the
audit, Juan dela Cruz became aware of the fact that he did not have the competence
required for the engagement. He must
a.
b.
c.
d.

46.

disclaim an opinion
issue a Subject to opinion
suggest that XYZ Corporation engage in another CPA to perform the audit
rely on the competence of client personnel

A CPAs opinion on financial statements is of little value to those who relied on him unless
he
a.
b.
c.
d.

47.

an unusual practice which should have voided the audit engagement


lack of competence on the part of the CPA
an appropriate part of the professional conduct of the audit engagement
undertaken as a responsibility of management

issues an unqualified opinion


maintains a program of continuing education
serves his client with professional concern for their best interest
maintains his independence

The essence of a CPAs independence is


a.
b.
c.
d.

avoiding significant financial interest in the clients business


performing the examination from the viewpoint of the stockholders
maintaining a mental attitude of impartiality
making sure no relatives or personal friends are employed by the client

48.

In determining independence with respect to any audit engagement, the ultimate decision
as to whether the auditor is independent must be made by the
a.
b.
c.
d.

49.

auditor
client
audit committee
public

A CPA in an audit engagement, where he lacks independence, should


a. disclaim an opinion on the financial statements
b. issue a piecemeal opinion
c. list, in the auditors report, all the generally accepted auditing procedures actually
performed by him
d. state the reason for his lack of independence in his auditors report

50.

To emphasize auditor independence from management, many corporations follow the


practice of
a. appointing a partner of the CPA firm conducting the examination to the corporations
audit committee
b. establishing a policy of discouraging social contact between employees of the
corporation and the staff of the independent auditor
c. requesting that a representative of the independent auditor to be on hand at the annual
stockholders meeting
d. having the independent auditor report to an audit committee of outside members of the
board of directors

51.

Which of the following best describes why publicly traded public corporations follow the
practice of having the outside auditor appointed by the board of directors or elected by the
stockholders?
a.
b.
c.
d.

52.

To comply with the regulations of the Financial Reporting Standards Council


To emphasize auditor independence from the management of the corporation
To encourage a policy of rotation of the independent auditors
To provide the corporate owners with an opportunity to voice their opinion concerning
the quality of the auditing firm selected by the directors

It would not be appropriate for the auditor to initiate discussion with the audit committee
concerning with
a. The extent to which the work of internal auditors will influence the scope of the
examination
b. Details of procedures which the auditor intends to apply
c. The extent to which change in the companys organizations will influence the scope of

the examination
d. Details of potential problems which the auditor believes might cause a qualified opinion
53.

With respect to the auditors planning of the year-end examination, which of the following
is always true?
a. An engagement should not be accepted after the fiscal year end
b. An inventory count must be observed at the balance sheet date
c. The clients audit committee should not be told of the specific audit procedures which
will be performed
d. It is an acceptable practice to carry out substantial parts of the examination at interim
dates

54.

Rogers & Co., CPAs have policies requiring that all members of the audit staff submit
weekly time reports to the audit manager, who then prepares a weekly summary work
report regarding variance from the budget for Rogers review. This provides written
evidence of Rogers & Co., CPAs professional concern regarding compliance with which
PSAs?
a.
b.
c.
d.

55.

Quality control
Due professional care
Adequate review
Adequate planning

Generally, evidential matter is considered sufficient when


a. It is competent
b. There is enough of it to afford a reasonable basis for an opinion on financial
statements
c. It has the qualities of being relevant, objective, and free from unknown bias
d. It has been obtained by random selection

56.

Evidential matter is considered to be competent when


a.
b.
c.
d.

57.

It has the qualities of being relevant, objective, and free from unknown bias
There is enough of it to afford a reasonable basis for an opinion on financial statement
It has been obtained by random selection
It consistent of written statements made by managers of the enterprise under audit

One of the requirements of the auditing standards is sufficient and evidential matter
should be obtained. The term competent refers primarily to
a.
b.
c.
d.

Relevance of the evidence


Measurability of the evidence
Consistency of the evidence
Dependability of the evidence

58.

The sufficiency and competency of evidential matter is determined by


a.
b.
c.
d.

59.

Madison Corporation has a few large accounts receivable that total P1,000,000. Nassau
Corporation has a great number of small accounts receivable that also total P1,000,000.
The importance of an error in any one account is, therefore, greater for Madison than for
Nassau. This is an example of the auditors concept of
a.
b.
c.
d.

60.

Philippines Standards on Auditing


Judgment of the auditor
Availability of corroborating data
Relevance of evidential matter

Materiality
Comparative analysis
Reasonable assurance
Relative risk

Which one of the following statements is correct concerning the concept of materiality?
a. Materiality is determined by reference to guidelines established by the Philippine
Institute of CPAs
b. Materiality depends only on the peso amount of an item relative to other fees in the
financial statements
c. Materiality depends on the nature of an item rather than the peso amount
d. Materiality is a matter of professional judgment

61.

Which of the following best describes the element of relative risk which underlies the
application of the PSAs?
a. Cash audit work may have to be carried out in a more conclusive manner than
inventory audit work
b. Intercompany transactions are usually subject to less detailed scrutiny than arms
length transactions with outside parties
c. Inventories may require more attention by the auditor on an engagement for a
merchandising enterprise than on an engagement for a public utility
d. The scope of the examination need not be expanded if errors that arouse suspicion of
fraud are of relatively insignificant amounts

62.

Independence of an auditor in relation to the enterprises may be impaired in the following


cases, except
a. Direct or material indirect financial interest in the enterprise
b. Connection with the enterprise as a promoter, underwriter, voting trustee, director,
officer or employee
c. Having a loan to or from the enterprise or any officer, director or principal stockholder

thereof, with certain exceptions


d. Engaged to render management advisory services to the enterprise
63.

One of a CPAs firms basic objective is to provide professional services that conform to
professional standards. Reasonable assurance achieving this basic objective is provided
through
a.
b.
c.
d.

64.

65.

When restrictions that significantly limit the scope of the audit are imposed by the client,
the auditor generally should issue which of the following opinions?
a. Except for
b. Disclaimer
c. Adverse
d. Unqualified
An auditor has withdrawn from an audit engagement of a publicly held company after
finding irregularities which may materially affect the financial statements. The auditor
should set forth the reasons and findings in correspondence to the
a.
b.
c.
d.

66.

Securities and Exchange Commission


Clients legal counsel
Stock exchanges where the companys stock is traded
Board of Directors

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

67.

A system of quality control


A system of peer review
Continuing professional education
Compliance with generally accepted reporting standards

Make inquiries of the proposed clients legal counsel


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

Which of the following statements is false?


a. The firm should obtain written confirmation of compliance with its policies and
procedures on independence from all firm personnel required to be independent by the
Code of Ethics
b. The firm should establish policies and procedures designed to provide it with
reasonable assurance that the firm and its personnel comply with relevant ethical
requirements
c. The firms quality control policies and procedures need not be documented and
communicated to the firms personnel
d. The firm should establish policies and procedures requiring appropriate documentation

to provide evidence of the operations of each element of its system of quality control
68.

In determining the form and content of documentation evidencing the operation of each of
the element of the system of quality control, the following factors should be considered
except
a.
b.
c.
d.

69.

70.

Size of the firm and the number of offices


Degree of authority that both personnel and officers have
Nature and complexity of the firms practice and organization
Geographical location of the offices

A practitioner should accept an assurance engagement only when the engagement


exhibits all of the following characteristics except
a. Subject matter is appropriate
b. Criteria to be used are suitable and are available to the intended users
c. Sufficient appropriate evidence to support the practitioners conclusion is accessible to
the practitioner
d. Practitioner is assured of being paid the engagement fee
Criteria need to be available to the intended users in an assurance engagement to allow
them to understand how the subject matter has been evaluated or measured. Which of the
following is not among the ways, by which these criteria could be made available to the
intended users?
a. Publicly
b. Through inclusion in a clear manner in the presentation of the subject matter
information
c. Through inclusion in the firms office policy manual
d. Through inclusion in a clear manner in the assurance report

71.

Which of the following is not a component of assurance engagement risk?


a.
b.
c.
d.

72.

Inherent risk
Control risk
Business risk
Detection risk

Reasonable assurance is less than absolute assurance. Reducing assurance


engagement risk to zero is very rarely attainable or cost beneficial because of the
following factors except
a.
b.
c.
d.

Use of selective testing


Inherent limitation of internal controls
Difficulty in meeting the stringent requirements of the regulatory agencies
Use of judgment in gathering and evaluating evidence and forming conclusions based
on that evidence

73.

PSA 300 (Redrafted), Planning an Audit of Financial Statements, requires, in part, that
audit work be properly planned. Proper planning as intended by this Standard would occur
when the auditor
a. Eliminates the possibility of counting inventory items more than once by arranging to
make extensive test counts
b. Uses negative accounts receivable confirmations instead of positive confirmations
because the latter require mailing of second requests and review of subsequent cash
collections
c. Compares all cash as of a particular date to avoid performing time-consuming cash
cutoff procedures
d. Physically observes the movement of securities already counted to guard against the
substitution of such securities for others that are not actually on hand

74.

The PSA recognizes that early appointment of the independent auditor has many
advantages to the auditor and the client. Which of the following advantages is least likely
to occur as a result of early appointment of the auditor?
a.
b.
c.
d.

75.

Which of the following is a basic tool used by the auditor to control the audit work and
review the progress of the audit?
a.
b.
c.
d.

76.

Time and expense summary


Engagement letter
Progress flowchart
Audit program

In the audit of a medium-sized trading company, which one of the following areas would
be expected to require the greatest amount of audit time?
a.
b.
c.
d.

77.

The auditor will be able to plan the audit work so that it may be done expeditiously
The auditor will be able to complete the audit work in less time
The auditor will be able to better plan for the observation of the physical inventories
The auditor will be able to perform the examination more efficiently and will be finished
at an early date after the year end

Liabilities
Assets
Revenues
Owners Equity

During the course of an audit of a medium-sized trading company, which one of the
following areas would be expected to require the greatest amount of audit time?
a.
b.
c.
d.

Assets
Liabilities
Revenues
Owners Equity

78.

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

79.

The auditor is likely to accumulate more evidence when the audit is for a company
a.
b.
c.
d.

80.

Whose stock is publicly held


Which has extensive indebtedness
Which is to be sold in the near future
All three of the above

Which of the following statements describes why a properly designed and executed audit
may not detect a material irregularity?
a. Audit procedures that are effective for detecting an unintentional misstatement may be
ineffective for an internal misstatement that is concealed through collusion
b. An audit is designed to provide reasonable assurance of detecting material error, but
there is no similar responsibility concerning material irregularities
c. The factors considered in assessing control risk indicated an increased risk of
intentional misstatements, but only a low risk of unintentional errors in the financial
statements
d. The auditor did not consider factors influencing audit risk for account balances that
have effects pervasive to the financial statements taken as a whole

81.

Which of the following circumstances most likely would cause an auditor to consider
whether material misstatements exist in an entitys financial statements?
a. Supporting records that should be readily available are frequently not produced when
requested
b. Reportable conditions previously communicated have not been corrected
c. Clerical errors are listed on a monthly computer-generated exception report
d. Differences are discovered during the clients annual physical inventory count

82.

Disclosure of irregularities to parties other than a clients senior management and its audit
committee or board of directors ordinarily is not part of an auditors responsibility.
However, to which of the following outside parties may a duty to disclose irregularities
exist?
To the SEC when the
client reports an auditor

To a successor auditor
when the successor

To a government funding
agency from which the

change
a.
b.
c.
d.
83.

makes appropriate
inquiries
Yes
No
Yes
Yes

Yes
Yes
No
Yes

client receives financial


assistance
No
Yes
Yes
Yes

What assurance does the auditor provide that errors, irregularities, and direct effect illegal
acts that are material to the financial statements will be detected?

a.
b.
c.
d.

Errors
Limited
Limited
Reasonable
Reasonable

Direct effect irregularities


Negative
Limited
Limited
Reasonable

Illegal acts
Limited
Reasonable
Limited
Reasonable

THE FINANCIAL STATEMENTS AUDIT


1.

Audit engagement letters generally include reference to the following except


a.
b.
c.
d.

2.

When a professional accountant is the auditor of a parent entity and also the auditor of its
subsidiary, branch or division (component), which of the following factors need not be
considered in deciding whether to send separate engagement letter to the component?
a.
b.
c.
d.

3.

Who appoints the auditor of the component


Whether a separate audit report is to be issued on the component
Legal requirements
Number of reports to be prepared during the peak audit season

On recurring audits, the auditor may decide not to send a new engagement letter each
period. In which of the following situations will there be no need to send a new letter?
a.
b.
c.
d.

4.

Objective of the financial statements


Managements responsibility for the financial statements
Scope of the audit
Identification of the audit team members

Revision of special terms of the engagement


Significant change in nature or size of the clients business
Recent change of middle management and rank and file organization structure
Indications of misunderstanding of the objective and scope of the audit

Which of the following will not necessarily lead the client to request for the auditor to
change the engagement to one which provides a lower level assurance?

a. Restrictions on the scope of the engagement, whether imposed by management or


caused by circumstances
b. Misunderstanding as to the nature of an audit or related service originally requested
c. Recent changes in senior management, board of directors or ownership
d. Change in circumstances affecting the need for the service
5.

For initial engagements, the auditor should obtain sufficient appropriate audit evidence for
the following except
a. That the opening balances do not contain misstatement that materially affect the
current periods financial statements
b. That the prior periods closing balances have been correctly brought forward to the
current period, or, when appropriate have been restated
c. That appropriate accounting policies are consistently applied or changes in accounting
policies have been properly accounted for or adequately disclosed
d. That the client has informed the predecessor auditor of his appointment as the new
auditor

6.

Before accepting an engagement to audit a new client, an auditor is required to


a. Make inquiries of the predecessor auditor after obtaining the consent of the
prospective client
b. Obtain the prospective clients signature to the engagement letter
c. Prepare a memorandum setting forth the staffing requirements and documenting the
preliminary audit plan
d. Discuss the management representation letter with the prospective clients audit
committee

7.

Which of the following is not one of the three main reasons why the auditor should
properly plan engagements?
a.
b.
c.
d.

8.

One of the major parts of audit planning is preplanning. Which of the following is not
involved during the preplanning phase?
a.
b.
c.
d.

9.

To help keep audit costs reasonable


To avoid misunderstandings with the client
To enable the auditor to obtain sufficient competent evidence
To enable proper on-the-job training of employees

Deciding whether to accept or continue this client


Obtaining information about clients legal obligations
Selecting staff for the engagement
Obtaining an engagement letter

Which of the following would not be a consideration of a CPA firm in deciding whether to

accept a new client?


a.
b.
c.
d.
10.

Where client is changing auditors, PSA requires communication between predecessor and
successor auditors. The burden of initiating the communication rests with the
a.
b.
c.
d.

11.

Clients probability of achieving an unqualified opinion


Clients financial ability
Clients relation with its previous CPA firm
Clients standing in the business community

Predecessor
Client
successor
SEC

The purpose of an engagement letter is to


a. Reduce the terms to writing in order to minimize misunderstandings
b. Reduce the CPA firms responsibility to external users of the audited financial
statements
c. Satisfy the Statute of Frauds which requires that contracts for professional services
must be in writing to be enforceable
d. Notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated

12.

The engagement letter will do one, some, or all of the following:


1.
2.
3.
4.
5.

State whether the CPA will perform audit, review, or compilation services
State whether the CPA will perform tax or management advisor or other services
State any restriction to be imposed on the CPAs work
Identify deadlines for completing the work
State the amount and type of work to be done by clients personnel in generating
auditors workpapers
6. State the CPAs fees for the engagement
7. Inform the client that the CPA does not have responsibility for detecting fraud
The engagement letter will do
a. Numbers 1, 2, 4, and 6
b. Numbers 1, 2, 3, 4, and 6
c. Numbers 1, 3, 5, and 7
d. All seven of the above stated items
13.

The engagement letter


a. Does affect the CPA firms responsibility to external users of audited financial
statements
b. Can affect legal responsibilities to the client

c. Can be used to alter the auditors responsibilities under the standards on auditing
d. Is useful only if it is an engagement, but has no effect for review or compilation
services
14.

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 auditors responsibility for the detection of errors or irregularities
b. An estimation of the time to be spent on the audit work by audit staff and management
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
suggestions as to any procedures requiring the clients attention

15.

Early appointment of the independent auditor will enable


a.
b.
c.
d.

16.

In an audit situation, communication between the successor and predecessor auditors


should be
a.
b.
c.
d.

17.

The auditors preliminary assessment of internal control


The auditors estimate of the fee for the engagement
Limitations on the scope of the engagement
A description of responsibility for the detection of fraud

Preliminary arrangements agreed to by the auditors and the client should be reduced to
writing by the auditors. The best place to set forth these arrangements is in
a.
b.
c.
d.

19.

Authorized in an engagement letter


Acknowledged in a representation letter
Either written or oral
Written and included in the working papers

Which of the following topics is not normally included in an engagement letter?


a.
b.
c.
d.

18.

A more thorough examination to be performed


A proper study and evaluation of internal control to be performed
Sufficient competent evidential matter to be obtained
A more efficient examination to be planned

A memorandum to be placed in the permanent section of the auditing working papers


An engagement letter
A client representation letter
A confirmation letter attached to the constructive services letter

Which statement is correct relating to a potential successor auditors responsibility for

communicating with the predecessor auditors in connection with a prospective new audit
client?
a. The successor auditors have no responsibility to contact the predecessor auditors
b. The successor auditors should obtain permission from the prospective client to contact
the predecessor auditors
c. The successor auditors should contact the predecessors regardless of whether the
prospective client authorizes contact
d. The successor auditors need not contact the predecessors if the successors are aware
of all available relevant facts
20.

An auditor who accepts an audit engagement and does not possess the industry expertise
of the business entity, should
a. Engage financial experts familiar with the nature of the business entity
b. Obtain a knowledge of matters that relate to the nature of the entitys business
c. Refer a substantial portion of the audit to another CPA who will act as the principal
auditor
d. First inform management that an unqualified opinion cannot be issued

21.

Before accepting an audit engagement, a successor auditor should make specific inquiries
of the predecessor auditor regarding the predecessors
a. Awareness of the consistency in the application of financial reporting standards
between periods
b. Evaluation of all matters of continuing accounting significance
c. Opinion of any subsequent events occurring since the predecessors audit report was
issued
d. Understanding as to the reasons for the change of auditors

22.

An auditor who has been invited to submit a proposal for an audit engagement is a
a.
b.
c.
d.

23.

Predecessor auditor
Successor auditor
Principal auditor
Interim auditor

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 the standards on auditing
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
24.

Engagement letters are widely used in practice for professional engagements of all types.
The primary purpose of the engagement letter is to?
a. Remind management that the primary responsibility for the financial statements rests
with management
b. Satisfy the requirements of the CPAs liability insurance policy
c. Provide a starting point for the auditors preparation of the preliminary audit program
d. Provide a written record of the agreement with the client as to services to be provided

25.

In making arrangements for an audit, there should be a clear understanding between the
auditor and the client as to the following except
a.
b.
c.
d.

26.

The type of audit to be performed


Terms of settlement of audit services
Assurance of auditors independence
Official to whom audit report shall be addressed

When a CPA is approached to perform an audit for the first time, the
CPA should make inquiries of the predecessor auditor. This procedure is necessary
because the predecessor may be able to provide the successor with information that will
assist the successor in determining
a. Whether the predecessors work should be utilized
b. Whether the company follows the policy of rotating its auditors
c. Whether in the predecessors opinion, internal control of the company has been
satisfactory
d. Whether the engagement should be accepted

27.

Before accepting an audit engagement, a successor auditor should make specific inquiries
of the predecessor auditor regarding
a. Disagreements of the predecessor had with the client concerning auditing procedures
and accounting principles
b. The predecessors evaluation of matters of continuing accounting significance
c. The degree of cooperation the predecessor received concerning the inquiry of the
clients lawyer
d. The predecessors assessments of inherent risk and judgments about materiality

28.

The predecessor auditor is required to respond to the request of the successor auditor for
information, but the response can be limited to stating that no information will be provided
when
a. Predecessor auditor has poor relations with successor auditor

b. Client is dissatisfied with predecessors work


c. There are legal problems between client and predecessor
d. Predecessor believes that client lacks integrity
29.

Aquino, CPA, requested permission to communicate with the predecessor auditors of a


prospective client. The prospective clients refusal to permit this will bear directly on
Aquinos decision concerning the
a.
b.
c.
d.

30.

Which of the following most accurately summarizes what is meant by the term material
misstatement?
a.
b.
c.
d.

31.

Adequacy of the preplanned audit program


Ability to establish consistency in application of accounting principles between years
Apparent scope limitation
Integrity of management

Fraud and direct-effect illegal acts


Fraud involving senior management and material fraud
Material error, material fraud, and certain illegal acts
Material error and material illegal acts

Which of the following statements is correct relating to the auditors consideration of


fraud?
a. The auditors interest in fraud consideration relates to fraudulent acts that cause a
material misstatement of financial statements
b. A primary factor that distinguishes fraud from error is that fraud is always intentional,
while errors are generally, but not always, intentional
c. Fraud always involves a pressure or incentive to commit fraud, and a misappropriation
of assets
d. While an auditor should be aware of the possibility of fraud, management, and not the
auditor, is responsible for detecting fraud

32.

Which of the following factors or conditions is an auditor least likely to plan an audit to
discover?
a.
b.
c.
d.

33.

Financial pressures affecting employees


High turnover of senior management
Inadequate monitoring of significant controls
Inability to generate positive cash flows from operations

Managements attitude toward aggressive financial reporting and its emphasis on meeting
projected profit goals most likely would significantly influence an entitys control
environment
a. External policies established by parties outside the entity affect its accounting

practices
b. Management is dominated by one individual who is also a shareholder
c. Internal auditors have direct access to the board of directors and the entitys
management
d. The audit committee is active in overseeing the entitys financial reporting policies
34.

Which of the following is least likely to be required on an audit?


a.
b.
c.
d.

35.

Which of the following factors would most likely to heighten an auditors concern about the
risk of fraudulent financial reporting?
a.
b.
c.
d.

36.

Test appropriateness of journal entries and adjustment


Review accounting estimates for biases
Evaluate the business rationale for significant unusual transactions
Make a legal determination of whether fraud has occurred

Large amounts of liquid assets that are easily convertible into cash
Low growth and profitability as compared to other entities in the same industry
Financial managements participation in the initial selection of accounting principles
An overly complex organizational structure involving unusual line of authority

An auditor who discovers that a clients employees have paid small bribes to public
officials most likely would withdraw from the engagement if the
a. Client receives financial assistance from a government agency
b. Evidential matter that is necessary to prove that the illegal acts were committed does
not exist
c. Employees actions affect the auditors ability to rely on managements representations
d. Notes to the financial statements fail to disclose the employees actions

UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT INCLUDING ITS INTERNAL


CONTROL AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT

1.

Which of the following is most correct concerning the understanding of internal control
needed by auditors to plan the audit?
a. The auditors must understand the control environment, but not the accounting system
or the control procedures
b. The auditors must understand the control environment, the accounting system, and not
the control procedures
c. The auditors must understand the control environment, the accounting system, and
must use judgment as to the control procedures which must be considered
d. The auditors must understand the control environment, the accounting system, and all

control procedures
2.

Which of the following would be of least interest to the auditors in considering internal
control?
a. Procedures that are concerned with the decision processes leading to managements
authorization of transactions
b. Procedures restricting access to assets
c. Procedures related to recording transactions
d. Policies concerning the reconciliation of accounting records to existing assets

3.

If the auditors do not perform tests of controls of certain assertions,


a. They have performed a substandard audit
b. They are not required to communicate reportable conditions relating to those accounts
to management and the board of directors
c. They must issue a qualified opinion
d. They must assess control risk at the maximum level for those assertions

4.

Which of the following comes closest to outlining the auditors responsibility for internal
control on all financial statement audits?
a. An understanding of the control environment and the accounting system is necessary;
an understanding of control procedures is necessary for areas in which the auditor is
performing tests of controls
b. The auditor must obtain an understanding of each of the three internal control
elements sufficient to plan the audit
c. When tests of controls have been performed, control risk must be assessed at a level
less than the maximum
d. An understanding of the control environment is necessary, but not of the accounting
system or control procedures unless control risk is assessed at a level less than the
maximum

5.

In the consideration of internal control, the effectiveness of the design of controls is tested
by
a.
b.
c.
d.

6.

Flowcharts
Tests of controls
Substantive tests
Decision tables

A significant deficiency in the design or functioning of the internal control structure that
could adversely affect an organizations ability to record, process, summarize, and report
financial data is referred to as a(n)
a. Material weakness in internal control

b. Inherent limitation of internal control


c. Management override
d. Reportable conditions
7.

For good internal control, which of the following functions should not be assigned to the
companys accounting department?
a.
b.
c.
d.

8.

Which of the following is not a responsibility that should be assigned to a companys


internal audit department?
a.
b.
c.
d.

9.

Reconciling accounting records with existing data


Recording financial transaction
Signing and paying check
Preparing financial reports

Evaluating internal control


Balancing subsidiary ledger
Reporting on the effectiveness of operating segments
Investigating potential merger candidates

Which of the following is true about the auditors consideration of internal control?
a. The auditors must assess control risk at a level lower than the maximum
b. The auditors must prepare a flowchart description of internal control for their working
papers
c. The auditors must obtain an understanding of the steps in processing major types of
transactions
d. The auditors must perform tests of controls

10.

Which of the following is an advantage of describing internal control through the use of a
standardized questionnaire?
a. Questionnaires highlight weaknesses in the system
b. Questionnaire are more flexible than other methods of describing internal control
c. Questionnaires usually identify situations in which internal control weaknesses are
compensated for by other strengths in the system
d. Questionnaire provide a clearer more specific portrayal of a clients system than other
methods of describing internal control