.

SELF TEST

Auditing Theory
Date:

Name:

Score:

General lnstruction: Read each questions carefully and select the best answer. Observe fairness and faithfulness at all
times. Cheating is.not tolerated in this examination; anyone caught in the act of cheating shall have a score of 0'0 in this
quiz'. Keep calm and pass this exam.
Encircle the letter of your choice in each of the following independent questions:

t.

Which of the following is mandatory if the auditor is to comply with generally accepted auditing standards?
Possession by the auditor of adequate technical training^
Use of analytical review ott audit engagements.
Use of statistical sampling whenever feasible on an audit engagement.
Confirmation by the auditor of material accounts receivable balances.

ii)
b.
c.
d.
2.

As a guidance for measuring the quality of the performance of an auditor, the auditor should refer to:
Statements of the Financial Accounting Standards Board.

a.
@
c.
d.

3.

,-

Generally Accepted Auditing Standards. .lnterpretations of the Statements on Auditing Standards'

Statements on Quality Control Standards.

Which of the foilowing is a violation of confidentiality of the Code of Professional Conduct?a. The CPA, in response to a court suhpgena, submits auditor-prepared working papers as evidence of possible
illegal acts perpetrated by the client.
b. The CPA discloses to the board of directors a scheme concocted by top management to intentionally inflate

'
\'

earnings.
The CPA warns Client B as to the inadvisability of acquiring Client A. The CPA bases this warning on knowledge
of Client A's financial condition and a belief that the managemerrt of Client A lacks integrity. This knowledge was
obtained by the CPA as a result of auditing Client A during the past several \earc..zThe CPA, when questioned in court, admits to knowledge of certain illegal acts perpetrated by the client.
generally accepted audltlng stanoaros r
Which of the following best describes what is meant by
Audit objectives gLnerally determined on audit engagements--

G:r

d.

4.

a.
b. Acts to be performed

by the auditor'

lc.Measuresofthequalityoftheauditor,sperformance.
d. Procedures to be used to ga[her evidence to support financial statements'
dete:t errors and fraud?
and the misapplication of
il.upiiniri,v of the'accounting records to intentional manipulations, alterations,

5. which of the foliowing factors is most important concerning

;. il"
b.

c.

an auditor's responsibility to

accounti ng PrinciPles..
result from unintentional bias or intentional attempts to
The probability that unreasonable accounting estimates
misstate the fi nancial statements'
misappropriation of assets may indicate the existence
The possibility that management fraud, defalcations, and

of illegal acts'
,
ai if," nrl,f'r, mistakes, falsifications, and omission may cause the financial statements to contain material
" misstatements.
6. The standard of professional competence and due care requires the auditor to:
, !.,
\

,6.

_
relevant factors before reaching a decision'
the
weighing
carefully
manner,
judgment
conscientious
in
a
Apply

b.Ensurethatthefinancialstatementsarefreefromerror.

c,

d,

7.

Make perfect judgment decisions in atl cases'

professicrr'
Possess skills clearly above the average for the

--

persons have adequate technical training and proficiency as an

The first general standard requires that a person or
auditor. This standard is met bY:
An understanding of the field of business and finance

a.

Education and experience in the field of auditing'cl.. Continuing professional education'

A thorough knowledge of the Philippine Standards on Auditing'

,'b,

d.

1ls*gtr

g.

possible management fraud'

Experience has:shown that certain conditions in-1n olganization are symptoms of
possible-fraud?
Which of the fo:llowing conditions qggldlqi be-co)rsidered an in_dicator of
Managers rbgularly assuming subordinates' duties'
:
Managers dealing in matters outside their profit center's
procedures'
and
directives
corporate
with
not
complying
Mariagers

a.
b.
c.

scope.

d;, Managers
g. {)r,i.r, of

subject to forrnal performance reviews on a regular basis,'particularlv the standards

the apptication of generally accepted auditing standards,

"*;;il;;il;;;ri;s

of field work and rePorting?

5) The elements of materiality and relative
-b. The element of internal control'

risk'--

c.

d.

The element of corroborating evidence'

The element of reasonable assurance'

that a material error does not exist in an

10. The probability of an auditor's procedures leading to the conclusion
account balance when, in fact, such error does exist is referred to as:
Control risk'
Prevention
Detection risk'--

c'
d'

risk.
lnherent risk.

a.
;.

anauditor'sprogramrelatingtovarious
11. Whichof thefollowingconceptsismostusefulinassessingthescopeof

a.
b:

c. The reliability of information'

d. Management fraud.

Attribute samPling'

Materiality,'

is influenced by the possibility of

12. Given that an ,rOi, in accordance with generally accepted auditing standards
attitude of:
material errors and fraud, the auditor should conduct the audit with an
c. Objective judgment'
a. Professional resPonsiveness'
d. Professional skePticisnr,advocacY.

b.

Conservative

must be taken seriously and pursued

L3. Warning signs that CaUse the auditor to question management integrity
dishonesty?
,i*OrJrlfV."Wfriotr of the following may lead the auditor to suspect management
numerous meetings with the
held
has
o. The president and chief executive officer of the client corporation
will maximize reported profits--.onaiorr!,. for the purpose of discussing accounting practices that
b. The client has been named as a defendant in a product llability suit'
import competition.
The client lras experienced a decrease in revenue from increased
may adversely affect the client's
obtain
to
difficult
more
d. A new regulation making customer licenses

--

'";

c.

oPerations.

14. Audit risk consists of all but the followinB components:

lnherent risk.
Detection risk.

' a.
b.

Li Substantive risk",'
d.

Control risk.

L5. Which of the following conditions supports anl!c!,e,gse in deteetion-risk?

i'e.l lnternal control ovei cash receipts is excellent.
b. Application of analytical procedures reveals a significant increase in sales revenue in December, the last
month of the fiscal Year.
lnternal control over shipping, billing, and recording of sales revenue is weak.'
d. Study of the business reveals that the client recently acquired a new company in an unrelated industry'

c.

of fraud?
16. Which of the following statements best describJs the auditor's rejpgryU|ity r.'g-garding the detection
a. The auditor is responsibr" ror ti"iriiuruio a.iu.t,fraud only *hen iuCh failure clearly reiults from.
nonperformance of audit procedures specifically described in the engagement letter.
The auditor sho'uld design audit procedures that'will provide reasonable assurance that the financial
statements are free from material misstatement due to errors andlor fraud.
examination
The auditor must extend auditing piocedures to actively search for evidence of fraud where the

r
i.h
c.

indicates that fraud maY exist'

d. The auditor is responsible

for the failure to detect fraud only when an unqualified oSiinion is issued'

17. With respect to errors and fraud, the auditor should plan to:
a. Search for errors or fraud that would have a material effect on the financial statements.
G]l Discover errors or fraud that would have a material effect on the financial statements'
or
Search for errors that would have a material effect and for fraud that would have either material
immaterial effects on the financial statements.-d. Search for fraud that would have a material effect and for errors that would have either material or
immaterial effects on the financial

'

c.

21il*6it

statements'

L8' The auditor notices significant fluctuations in key elements of the company's financial statements. lf management
is
unable to piiwide an acceptable explanation, the auditor should:
a. Consider the matter a scope limitation.
$; Perform additional audit procedures to investigate the matter further:.- , c. )ntensify the examination with the expectation of detecting management fraud.
d. Withdraw from the engagement.
19. A study and evaluation of internal control made in connection with an annual audit is usually not sufficient to
- '
express an opinrion on an dntity's internal cont.ol
a. 'Weakn6sses in the system may go unnoticed during the audit engagement-b. A study s6d evaluation of internal control is not necessarily made during an audit engagement.
Only those controls of interest to the auditor are reviewed, tested, and evaluated,
lnternal controls can change each year.

because:

"

Gf
d.

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 an opinion.
c. Negative confirmation.-_Negative assurance.
d. piecemeal opinion.
e
21. Which of the following is not a distinction between a compilation and a review?
a. The CPA must be independent as a prerequisite to performing a review engagement, but need not be
independent to perform a compilation.
ln conducting a review, the CPA must obtain an understanding of the client's internal control system; but
.'b:
'" this is not necessary
for a compilation engagement.
, c. Analytical procedures are applied in a review engagement, but are not required in a compilationl
d. A compilation offers no assurance, whereas a review provides limited assurance, ,an
22. Whichofthefollowingshouldnotbeincludedinanaccountant'sstandardreportbaseduponthecompilationof
entity's fina ncial statements?
a. A statement that a compilation is limited to presentirrg in the form of financial statements information that
is the representation of inanagement.
b. A statement that the compilation was performed in accordance with standards established by the Philippine

lnstitute of

CPAs.

c. A statement that the accountant has not audited or reviewed

;''d::

the financial statements.

but expresses only limited assurance on the
an
opinion
not
express
does
accountant
A statemerrt that the
financial statements.

23. lnwhichofthefollowingreportsshouldaCPAnotexpress negativeorlimitedassurance?

'd',
report on financial statements of a non-public entity.,.
i'b. A standird compilation
A standard review report on financial statements of a non-public entiti'.
c. A standard review riport on interim financial statements of a public entity.
d. A standard comfort letter on financial information included in a registration statement of a public entity.
:

24. Which of the following is incorrect regarding engagement perlod?

, a. The period of th6 engigJment starts when the assurance team begins to perform assurance services and
ends wh'en the assurance report is issued, except when the assurance engagement is of a recurring nature.
i'b. lf the assurance engagement is expected to recur, the period of the assurance engagement ends with the
notification by either party that the professional relationship has terminated or the issuance of the final
assurance report, whichever is ea.rlier.
c. ln the case of an audit engagement, the engagement period includes the period covered by the financial
statements reported on by the firm.-d. When an entity becomes an audit client during or after the period covered by the financial statements that
the firm will report on, the firm should consider whetlrer any threats to independence may be created by
previous services provided tp the audit client.
25.

lf

amember of the assurance team, or their immediate family member, has a direct financial interest, or a material
indirect financial interest, in the assurance client, the self-interest threat created would be so significant th.e only
safeguards available to eliminate the threat or reduce it to an acceptable level would be to (choose the incorrect
one)

A.

b.

dispose of the direct financial interest prior to the individual becoming a member of the assurance team.
dispose of the indirect financial interest in total prior to the individual becoming a member of the assurance

team.'-'

3tl;rgc

' c.
..

disposelof a sufficient amount of the indirect financial interest so that the remaining interest is no longer
nnaterial prior to the individual becoming a member of the assurance team.
fti.'r linrit the participation of the member of the assurance team.

26. lf a member of the assurance team, or their immediate family member receives, by way of, for example, an
inheritance, gift or, as a result of a merger, a direct financial interest or a material indirect financial interest in the
assurance client, a self-interest threat would be created. The following safeguards should be applied to eliminate
the threat or reduce it to an acceptable level:
a. Disposing,of the financial interest at the earliest practical date.
b. Removing the member of the assurance team from the assurance engagement.
(if Either a'orb --

d.

Neither a nor b

Aclient company has not paid its 20L3 audit fees. According to the Code of Professional Conduct, for the auditor to
'be considerecl independent with respect to the 2014 audit, the 2013 audit fees must be paid before the
c. 2014 field work is started
a. 2013 report is issued
d. 2015 field work is started
2014 report is issued.,

27.

,ji

Zg.

When a firm obtains an assurance engagement at a significantly lower professional fee than that charged by the
predecessor firm, or quoted by otlrer firms, a(an):
advocacy threat is created.
a. threat to independence is not created.
is
b. intimidation threat
ltii' self-interest thieat is created.

created.

Zg.

-.-'

Fees calculated on a predetermined basis relating

work performed.
'e. Contingent fees

b.

fees

FIat sum

.-

c.

to the outcome or result of a transaction or the result of the

c' Retainer fees
d.Per diem fees

30. When indepenience is threatened by*![g-ryio,1.!g!we-en the member of the assurance team and-Jhe-client
)

management, tlre following safeguards that

a.
b.

c.

t.d,

iin reduCi the effect to an acceptable

level may be appliedi except:

lnvolve an additional professional accountant in the firm who is not a member of the assurante team to
review the work done.
Disclose to the audit committee, or others charged with governance, the extent and the nature of the
litigation.
Remove the particular member of the assurance team who is involved in litigation from the engagement.
Submit a new engagement

letter--

31. The provision of accountlng and bookkeeping services to audit clients in emergency or other unusual situations,
when it is impractical for the audit client to make other arrangements, would not be considered to pose an
ulacceptable threat to independence provided:
a. The firm, or network fiim, does not assume any managerial role or make any managerial decisions.
b. The audit client accepts responsibility for the results of the work.
Personnel providing the services are not members of the assurance team.
All of the given choices.

c.
j

32.

lf the valuation services involves the valuation of matters material to the financial statements and the valuation
involves a significant degree of subjecUity, th'e self-review threat created (cb.qg:-g -tbg ipgg-rrect one)
a. Could not be reduced to anlccepti*Ule level by the application of any saieguarO.
it Could be reduced to an acceptable level by the application of safeguards,,'a. Such valuation services should not be provided.
d. The assurance team should withdraw from the audit engagement, if the team opted to perform the valuation
i

servtces.

33.

, The following would 1ot generally create a significant threat to indepgndencb, except:
a. When a firm, or a network firm, performs a valuation service for an audit client for the purposes of making a
filing or return to a tax authority.
formal taxation opinions and assistance in the resolution of tax disputes to an audit client.
The firm renders internal services involving an extension of the procedures required to conduct an audit in
accordance with Philippine Standards on Auditing to an audit client.--When the firm, or a network firm, provides assistance in the performance of a client's internal audit activities
or undertakes the outsourcing of some of the activities.

b. The firm provides

c.

,{il

34. Which of the following may least likely create a self-review threat?
4lI;:So

rllss
,l

a. The lending of staff by a firm to the financial staternent audit client.

b. The firm provides internal audit services to the financial statement audit client. -r

, c.
.

litigation support services to the financial statement audit,

Recruitment of senior manager for the financial statement audit client.

The

ci:

firm

_r.enders

35. The term professional accountant in public practice includes the following, except:
a. A sole proprietor providing professional services to a client'
b. A firm of professional accountants in public practiqe.
c. Each partner or person occupying a position similar to that of a partner staff in a practice providing
services to a client.
^ professional
professional accountants employed in the public sector having managerial responsibilities'

professional services performed in the

36. The revised code of Ethics is mandatory for all CPAs and is applicable to
Philippines on or:
Before JanuarY 1, 2008
i.a. After June 30,2008
1, 2008
After.january
d.
tsefore June 30,2008

b.

c.

37. \Mhich of the following is not explicitly referred to in the Code of Ethics as source of technical standards?
c. Securities and Exchange commission (sEc)
a. commis'sion on Appointment (coA) d. Relevantlegislation
b. Auditing and Assurance Standards Council
(AAsc)
|-

38. lmmediate famiiy as defined in the code of conduct, includes:

parent.

a.

c.

d.

non-dependentchild.
siblings.

family
39. Any confidential information obtained during the course of audit procedure should not be disclose to a close
which includes the following, except:

a. Parent
b. Non-dependent child

40.

The subject matter of auditing consists of:

a; Assertions"6. Established criteria.

c.
d.

Sibling
spouse

c'

Evidence'

d.

Written reports'

41. A typical objective of an operational audit is for the auditors to

a. determine whether the financial statements fairly present the entity's operations.
b. evaluate the feasibility of attaining the entity's operational objectives. ci mal<e recommendations for improving performance.
d. report on the entity's relative success in attaining its profit maximization.
42. Which one of the following best describes tl're assurance process?
, a. Proving the accuracy of the books and records
b, Gathering evidence about specific and known assertions
(. Assisting management in the successful operations of the company
d. Assembling and filing tax returns and related supplemental information
I

43. Which one of the following is an example of management expectations for independent auditors?
An expert providing a written communication as the product of the engagement-i e,
Y Individuals who perform day-to-day accounting functions on behalf of the company
c. An active participant in management decision making
d. An internal source of expertise on financial and other ntatters

44. Public accountants are not prohibited from providing which of the following services for public audit clients:
,,"1-l audits of,the effectiveneis of internal controls.-b. the function of the internal auditors

c.

d.

selection and implementation of an accounting information system

quarterly financial statement bookkeeping ..

45. Assurance services involve all of the following except:

a. lmproving the quality of information for decision purposes*,.
b. lmproving the quality of the decision model used.
, c. lmproving the relevance of information.

5lPng,:

d.

'

lmplementing a system that improves the processing of information.

46. ln forming an opinion on the financial statements,

te. the auditor should evaluate the conclusions drawn from the audit evidence obtained during the course of
the audit_
. b. the auditor evaluates whether there is a reasonable assurance about whether the financial statements ale
free from any misstatements
c. the auditor evaluates whether sufficiently appropriate audit evidence has been obtained to eliminate the

d.

risk of material rnisstatements

the auditor verifies that all errors that misstate the financial statements have been corrected by the client

47. If the auditor encoullerscircumstances'that led him to conclude that compliance with a specific requirement results
to financial statements that are misleading, the auditor:
,i. considers the need to appropriately modirythe audito/s reportb. does not need to modify the report
c. needs to issue qualified opinion
d. needs to disclaim his opinion
_

48.

An expectation of the public is that the auditor will recognize that the primary users of audit services are:
the investors and creditors
a. the employees
the board of directors
b. 'the Securities and Exchange Commission

49.

Which of the following represents a situation in which an auditor is reasonably independent of the client?
d.: The auditoris paid bythe client organization rather than the-nse?s ofthe financial statements,-b. The auditor takes a personal loan from the president of the company.
The auditor's dependent son holds 25 shares ofthe client's common stock.
d. 'l'he auditor has not received payment for the previous a[dit services.

c.
d.

c.

50.

A CPA firm is considered indepenCent when it performs which of the following services for a publicly traded audit

client?

a. Sewing as a member of the client's board of directors.

, b. DetermininB which accounting policies will be adopted by the client.-.
c. Accounting information system design and implementation.
r.d.

Tax return preparation as approved by the board of directors.

****

END OF EXAMINATION

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