D.

ASSURANCE SERVICES
1.

2.

3.

4.

5.

7.

Which of the following statements best describes assurance services?

A. Independent professional services that are intended to enhance the credibility of
information to meet the needs of an intended user.
B. Services designed to express an opinion on the fairness of historical financial statements
based on the results of an audit.
C. The preparation of financial statements or the collection, classification, and summarization
of other financial information.
D. Services designed for the improvement of operations, resulting in better outcomes.

8.

Which of the following is not an assurance service?

A. Examination of prospective financial information
B. Audit of historical financial statements
C. Review of financial statements
D. Compilation of financial information
Suitable criteria are required for reasonably consistent evaluation or measurement of the
subject matter of an assurance engagement. Which of the following statements concerning the
characteristics of suitable criteria is correct?
A. Reliable criteria contribute to conclusions that are clear, comprehensive, and not subject to
significantly different interpretations.
B. Relevant criteria allow reasonably consistent evaluation or measurement of the subject
matter including, where relevant, presentation and disclosure, when used in similar
circumstances by similarly qualified practitioners.
C. Neutral criteria contribute to conclusions that are free from bias.
D. Criteria are sufficiently complete when they contribute to conclusions that are clear,
comprehensive, and not subject to different interpretations.
In an assurance engagement, the outcome of the evaluation or measurement of a subject
matter against criteria is called
A. Subject matter information
B. Subject matter
C. Assurance
D. Conclusion
In some assurance engagements, the evaluation or measurement of the subject matter is
performed by the responsible party, and the subject matter information is in the form of an
assertion by the responsible party that is made available to intended users. These
engagements are called
A. Direct reporting engagements
B. Assertion-based engagements
C. Non-assurance engagements
D. Recurring engagements

Absolute assurance engagement

What type of assurance engagement is involved when the practitioner expresses a negative
form of conclusion?
A. Reasonable assurance engagement
B. Negative assurance engagement
C. Assertion-based assurance engagement
D. Limited assurance engagement
Which of the following statements is true concerning evidence in an assurance engagement?
A. Sufficiency is the measure of the quantity of evidence.
B. Appropriateness is the measure of the quality of evidence, that is, its reliability and
persuasiveness.
C. The reliability of evidence is influenced not by its nature but by its source.
D. Obtaining more evidence may compensate for its poor quality.

9.

Assurance engagement risk is the risk

A. That the practitioner expresses an inappropriate conclusion when the subject matter
information is materially misstated.
B. Of expressing an inappropriate conclusion when the subject matter information is not
materially misstated.
C. Through loss from litigation, adverse publicity, or other events arising in connection with a
subject matter reported on.
D. Of expressing an inappropriate conclusion when the subject matter information is either
materially misstated or not materially misstated.

10.

Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as a
result of the following factors, except
A. The use of selective testing.
B. The fact that much of the evidence available to the practitioner is persuasive rather than
conclusive.
C. The practitioner may not have the required assurance knowledge and skills to gather and
evaluate evidence.
D. The use of judgment in gathering and evaluating evidence and forming conclusions based
on that evidence.

11.

The Philippine Framework for Assurance Engagements

A. Contains basic principles, essential procedures, and related guidance for the performance
of assurance engagements.
B. Defines and describes the elements and objectives of an assurance engagement, and
identifies engagements to which PSAs, PSREs, and PSAEs apply.
C. Provides a frame of reference for CPAs in public practice when performing audits, reviews,
and compilations of historical financial information.
D. Establishes standards and provides procedural requirements for the performance of
assurance engagements.

12.

After accepting an assurance engagement, a practitioner is not allowed to change the

engagement to a non-assurance engagement, or from a reasonable assurance engagement to
a limited assurance engagement, except when there is reasonable justification for the change.
Which of the following ordinarily will justify a request for a change in the engagement?

6.What type of assurance engagement is involved when the practitioner expresses a positive form of
conclusion?
A. Limited assurance engagement
B. Positive assurance engagement
C. Reasonable assurance engagement

Page 1 of 27

I.
II.
A.
B.

A change in circumstances that affects the intended users requirements.

A misunderstanding concerning the nature of the engagement.
I only
II only

C.
D.

Both I and II
Neither I nor II

19.
AUDITING AND RELATED SERVICES
13.

14.

15.

16.

PSRE 2400 (Engagements to Review Financial

Statements), as amended by the AASC in February
2008, applies to
A. Reviews of any historical financial information
of an audit client.
B. Reviews of any historical financial information
by a practitioner other than the entitys
auditor.
C. Reviews of historical financial or other
information by a practitioner other than the
entitys auditor.
D. Reviews of historical financial or other
information of an audit client.

Compilation
upon Procedures
No
No
Yes
Yes

18.

20.

II.
A.
B.
C.
D.

Either I or II
II only

D.

The overall objectives of the auditor in conducting

an audit of financial statements are

A.
B.
C.
D.

To obtain reasonable assurance about

whether the financial statements as a
whole are free from material misstatement,
whether caused by fraud or error.
To report on the financial statements.
To obtain conclusive rather than persuasive
evidence.
To detect all misstatements, whether due to
fraud or error.

I and II only
II and IV only
I, II, and III only
I, II, III, and IV

21.

The auditor is required to maintain professional

skepticism throughout the audit. Which of the
following statements concerning professional
skepticism is false?
A. A belief that management and those charged
with governance are honest and have
integrity relieves the auditor of the need to
maintain professional skepticism.
B. Maintaining professional skepticism
throughout the audit reduces the risk of using
inappropriate assumptions in determining the
nature, timing, and extent of the audit
procedures and evaluating the results thereof.
C. Professional skepticism is necessary to the
critical assessment of audit evidence.
D. Professional skepticism is an attitude that
includes questioning contradictory audit
evidence obtained.

22.

Which of the following best describes the reason

why independent auditors report on financial
statements?
A. A management fraud may exist and it is more
likely to be detected by independent auditors.
B. Different interests may exist between the
company preparing the statements and the
persons using the statements.
C. A misstatement of account balances may
exist and is generally corrected as the result
of the independent auditors work.
D. Poorly designed internal control may be in
existence.

23.

Which of the following professionals has primary

responsibility for the performance of an audit?
A. The managing partner of the firm.

The practitioner attaches a report to that

financial information.
The practitioner consents to the use of
his/her name in a professional connection.

I only
II only
Either I or II
Neither I nor II

B.

IV.

A practitioner is associated with financial

information when
I.

C.

II.
III.

No
No
Yes
Yes

A practitioner should accept an assurance

engagement only if
A. The subject matter is in the form of financial
information.
B. The criteria to be used are not available to
the intended users.
C. The practitioners conclusion is to be
contained in a written report.
D. The subject matter is the responsibility of
either the intended users or the practitioner.

I only

I.

Review AgreedYes
No
No
Yes

A.

Both I and II

Independence is not a requirement for which of

the following engagements?

A.
B.
C.
D.
17.

I. The PSA is in effect.

II. The circumstances addressed by the PSA
exist.

When performing a compilation engagement, the

accountant is required to
A. Assess internal controls.
B. Make inquiries of management to assess the
reliability and completeness of the
information provided.
C. Verify matters and explanations.
D. Obtain a general knowledge of the business
and operations of the entity.
Inquiries and analytical procedures ordinarily form
the basis for which type of engagement?
A. Agreed-upon procedures.
B. Audit.
C. Examination.
D. Review.

The auditor is required to comply with all PSAs

relevant to the audit of an entitys financial
statements. A PSA is relevant to the audit when

Page 2 of 27

B.
C.
D.
24.

25.

The senior assigned to the engagement.

The manager assigned to the engagement.
The partner in charge of the engagement.

What is the proper organizational role of internal

auditing?
A. To serve as an independent, objective
assurance and consulting activity that adds
value to operations.
B. To assist the external auditor in order to
reduce external audit fees.
C. To perform studies to assist in the attainment
of more efficient operations.
D. To serve as the investigative arm of the audit
committee of the board of directors.
Operational audits generally have been conducted
by internal and COA auditors, but may be
performed by certified public accountants. A
primary purpose of an operational audit is to
provide
A. A measure of management performance in
meeting organizational goals.
B. The results of internal examinations of
financial and accounting matters to a
companys top-level management.
C. Aid to the independent auditor, who is
conducting the examination of the financial
statements.
D. A means of assurance that internal
accounting controls are functioning as
planned.

26.

Governmental auditing often extends beyond

examinations leading to the expression of opinion
on the fairness of financial presentation and
includes audits of efficiency, economy,
effectiveness, and also
A. Accuracy.
B. Evaluation.
C. Compliance.
D. Internal control.

27.

Which of the following terms best describes the

audit of a taxpayers return by a BIR auditor?
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit.

28.

Which of the following statements concerning

consulting services is false?
A. The performance of consulting services for
audit clients does not, in and of itself, impair
the auditors independence.
B. Consulting services differ fundamentally from
the CPAs function of attesting to the
assertions of other parties.
C. Consulting services ordinarily involve external
reporting.
D. Most CPAs, including those who provide audit
and tax services, also provide consulting
services to their clients.

29.

Which of the following is the most appropriate

action to be taken by a CPA who has been asked
to perform a consulting services engagement
concerning the analysis of a potential merger if

he/she has little experience with the industry

involved?
A. Accept the engagement but he/she should
conduct research or consult with others to
obtain sufficient competence.
B. Decline the engagement because he/she
lacks sufficient knowledge.
C. Accept the engagement and issue a report
that contains his/her opinion on the
achievability of the results of the merger.
D. Accept the engagement and perform it in
accordance with Philippine Standards on
Auditing (PSAs).
30.

An objective of a performance audit is to

determine whether an entitys
A. Operational information is in accordance with
government auditing standards.
B. Specific operating units are functioning
economically and efficiently.
C. Financial statements present fairly the results
of operations.
D. Internal control is adequately operating as
designed.

31.

Internal auditors should review the means of

physically safeguarding assets from losses arising
from
A. Exposure to the elements.
B. Underusage of physical facilities.
C. Misapplication of accounting principles.
D. Procedures that are not cost justified.

32.

The internal auditing departments responsibility

for deterring fraud is to
A. Establish an effective internal control system.
B. Maintain internal control.
C. Examine and evaluate the system of internal
control.
D. Exercise operating authority over fraud
prevention activities.

33.

Internal auditors review the adequacy of the

companys internal control system primarily to
A. Help determine the nature, timing, and extent
of tests necessary to achieve audit objectives.
B. Determine whether the internal control
system provides reasonable assurance that
the companys objectives and goals are met
efficiently and economically.
C. Ensure that material weaknesses in the
system of internal control are corrected.
D. Determine whether the internal control
system ensures that financial statements are
fairly presented.

34.

Which of the following services, if any, may a

practitioner who is not independent provide?
A. Compilations but not reviews.
B. Reviews but not compilations.
C. Reviews but not financial statement audits.
D. Agreed-upon procedures but not
compilations.

THE ACCOUNTANCY PROFESSION

Page 3 of 27

35.

36.

37.

38.

The members of the Professional Regulatory Board

of Accountancy shall be appointed by the
A. Philippine Institute of CPAs (PICPA).
B. Professional Regulation Commission (PRC).
C. President of the Philippines.
D. Association of CPAs in Public Practice
(ACPAPP).
The following statements relate to the submission
of nominations to the Board of Accountancy.
Which is correct?
A. The Accredited National Professional
Organization of CPAs (APO) shall submit its
nominations to the president of the
Philippines not later than sixty (60) days prior
to the expiry of the term of an incumbent
chairman or member.
B. The APO shall submit its nominations to the
PRC not later than thirty (30) days prior to the
expiry of the term of an incumbent chairman
or member.
C. If the APO fails to submit its own nominee(s)
to the PRC within the required period, the PRC
in consultation with the Board of Accountancy
shall submit to the president of the
Philippines a list of five (5) nominees for each
position.
D. There should be adequate documentation to
show the qualifications and primary field of
professional activity of each nominee.
The following statements relate to the term of
office of the chairman and members of the Board
of Accountancy (BOA). Which is false?
A. The chairman and members of the BOA shall
hold office for a term of three (3) years.
B. Any vacancy occurring within the term of a
member shall be filled up for the unexpired
portion of the term only.
C. No person who has served two successive
complete terms as chairman or member shall
be eligible for reappointment until the lapse
of two (2) years.
D. Appointment to fill up an unexpired term is
not to be considered as a complete term.

Appraisal
Peer review

D.

10

C.
2

B.

D.
3

40.

Which of the following shall be issued to

examinees who pass the CPA licensure
examination?
A. Certificate of registration and death
certificate.
B. Professional identification card and warrant of
arrest.
C. Certificate of registration and professional
identification card.
D. Warrant of arrest and death certificate.

41.

Which of the following statements concerning the

issuance of Certificates of Registration and
Professional Identification Cards to successful
examinees is correct?
A. The Certificate of Registration issued to
successful examinees is renewable every
three (3) years.
B. The Professional Identification Card issued to
successful examinees shall remain in full
force and effect until withdrawn, suspended
or revoked in accordance with RA 9298.
C. The BOA shall not register and issue a
Certificate of Registration and Professional
Identification Card to any successful
examinee of unsound mind.
D. The BOA may, after the expiration of three (3)
years from the date of revocation of a
Certificate of Registration, reinstate the
validity of a revoked Certificate of
Registration.

42.

Which of the following statements concerning

ownership of working papers is incorrect?
A. All working papers made by a CPA and his/her
staff in the course of an examination remain
the property of such CPA in the absence of a
written agreement between the CPA and the
client to the contrary.
B. Working papers include schedules and
memoranda prepared and submitted by the
client of the CPA.
C. Working papers include reports submitted by
a CPA to his/her client.
D. Working papers shall be treated confidential
and privileged unless such documents are
required to be produced through subpoena
issued by any court, tribunal, or government
regulatory or administrative body.

43.

Any person who shall violate any of the provisions

of the Accountancy Act or any of its implementing
rules and regulations promulgated by the Board of
Accountancy subject to the approval of the PRC,
shall, upon conviction, be punished by
A. A fine of not more than P50,000.
B. Imprisonment for a period not exceeding two
years.
C. A fine of not less than P50,000 or by
imprisonment for a period not exceeding two
years or both.
D. Lethal injection.

The Board of Accountancy has the power to

conduct an oversight into the quality of audits of
financial statements through a review of the
quality control measures instituted by auditors in
order to ensure compliance with the accounting
and auditing standards and practices. This power
of the BOA is called
A. Quality assurance review
C.

B.

A.

Quality control

39.The Board of Accountancy shall submit to the PRC the

ratings obtained by each candidate within _____
days after the examination, unless extended for
just cause.

Page 4 of 27

D.
44.

45.

Which of the following statements concerning the

use of firm or partnership name is incorrect?
A. In the case of an individual CPA, he/she shall
do business under his/her registered name
with the BOA and the PRC and as printed in
his/her CPA certificate (for example, Juan
Puruntong, CPA).
B. In the case of a firm, it shall do business
under its duly registered and authorized firm
name appearing in the registration
documents issued by the Department of
Trade and Industry (DTI) and other
government offices and such firm name shall
include the real name of the sole proprietor as
printed in his/her CPA certificate (for example,
ArnulfoGumamela and Associates).
C. In the case of a registered partnership, it shall
do business under its name as indicated in its
current Articles of Partnership and Certificate
of Registration issued by the Securities and
Exchange Commission (SEC) (for example,
Tanya, Sam, and Jervi, CPAs).
D. A CPA shall practice only under an individual,
firm, or partnership name in accordance with
Philippine laws and shall not include any
fictitious name but may indicate
specialization.
A partner surviving the death or withdrawal of all
the other partners in a partnership may continue
to practice under the partnership name for a
period of not more than _____ years after
becoming a sole proprietor.
A. 1
C.
3
B.

46.

48.

Which of the following statements concerning a

CPAs disclosure of confidential client information
is ordinarily correct?
A. Disclosure may be made to any party on
consent of the client.
B. Disclosure should not be made even if such
disclosure will protect the CPAs professional
interests in legal proceedings.
C. Disclosure should be made only if there is a
legal or professional duty to make the
disclosure.
D. Disclosure may be made to any government
agency without subpoena.

49.

Listed below are names of four CPA firms and

pertinent facts relative to each firm. Unless
otherwise indicated, the individuals named are
CPAs and partners, and there are no other
partners. Which is a violation of the Implementing
Rules and Regulations of RA 9298?
A. Tin, Ton and Tan, CPAs (Tin died about five
years ago; Ton and Tan are continuing the
firm.)
B. Pol and Bon, CPAs (The name of Cua, a third
partner, is omitted from the partnership
name.)
C. Joni and Jona, CPAs (Joni died about three
years ago; Jona is continuing the firm as a
sole proprietor.)
D. Elias and Co., CPAs (The firm has ten other
partners who are all CPAs).

50.

The following statements relate to some of the

provisions of RA 9298. Which is correct?
A. Audit working papers are generally the
property of the company whose financial
statements were audited.
B. After three (3) years, subject to certain
conditions, the Board of Accountancy may
order the reinstatement of a CPA whose
certificate of registration has been revoked.
C. The penal provision (Sec. 36) of RA 9298
applies only to the violation of any of the
provisions of RA 9298 because its
Implementing Rules and Regulations are
unenforceable.
D. It shall be the primary duty of the PRC and
the BOA to effectively enforce the provisions
of RA 9298.

D.
4

The death or disability of an individual CPA and/or

the dissolution and liquidation of a firm or
partnership of CPAs shall be reported to the BOA
not later than _____ days from the date of such
death, dissolution or liquidation.
A. 15
C.
60
B.

47.

30

D.
90

The following statements relate to CPE credit

units. Which is incorrect?
A. The total CPE credit units for registered
accounting professionals shall be sixty (60)
credit units for three (3) years, provided that
a minimum of fifteen (15) credit units shall be
earned in each year.
B. Any excess credit units in one year may be
carried over to the succeeding years within
the three-year period.
C. Excess credit units earned may be carried
over to the next three-year period including
credit units earned for doctoral and masters
degrees.

One credit hour of CPE program, activity or

source shall be equivalent to one (1) credit
unit.

THE CPAS PROFESSIONAL RESPONSIBILITIES

51.

Page 5 of 27

Which of the following statements best explains

why the CPA profession has found it essential to
establish ethical standards and means for
ensuring their observance?
A. Vigorous enforcement of an established code
of ethics is the best way to prevent
unscrupulous acts.

B.

C.
D.

52.

53.

Ethical standards that emphasize excellence

in performance over material rewards
establish a reputation for competence and
character.
A distinguishing mark of a profession is its
acceptance of responsibility to the public.
A requirement for a profession is to establish
ethical standards that stress primarily a
responsibility to clients and colleagues.

Which part of the Code establishes the

fundamental principles of professional ethics for
professional accountants and provides a
conceptual framework that professional
accountants shall apply to identify threats to
compliance with the fundamental principles,
evaluate the significance of the threats identified,
and apply safeguards, when necessary, to
eliminate the threats or reduce them to an
acceptable level?
A. Part A.
B. Part B.
C. Part C.
D. Part D.
The threat that a professional accountant will be
deterred from acting objectively because of actual
or perceived pressures from the client is known as
A. Intimidation threat
B. Familiarity threat.
C. Self-interest threat.
D. Advocacy threat.

54.

Which of the following will not create self-interest

threat for a professional accountant in public
practice?
A. The possibility of losing a significant client.
B. Direct financial interest in the assurance
client.
C. Undue dependence on total fees from a
client.
D. Preparing the original data used to generate
records that are the subject matter of the
assurance engagement.

55.

Familiarity threat could be created under the

following circumstances except
A. A professional accountant accepting gifts
from a client whose value is inconsequential
or trivial.
B. Senior personnel having a long association
with the assurance client.
C. A director or officer of the client or an
employee in a position to exert significant
influence over the subject matter of the
engagement having recently served as the
engagement partner.
D. A member of the engagement team having a
close or immediate family member who is a
director or officer of the client.

56.

This threat to independence occurs when a

member of the assurance team has recently
performed services for an assurance client that
directly affect the subject matter information of
the assurance engagement (e.g., valuation
services).
A. Self-review threat.

B.
C.
D.

Advocacy threat.
Self-interest threat.
Familiarity threat.

57.

Which of the following circumstances may create

advocacy threat for a professional accountant in
public practice?
A. The firm promoting shares in an audit client.
B. A firm issuing an assurance report on the
effectiveness of the operation of financial
systems after designing or implementing the
systems.
C. A firm being threatened with dismissal from a
client engagement.
D. A firm being concerned about the possibility
of losing a significant client.

58.

The following circumstances may create

intimidation threats, except
A. Being threatened with dismissal or
replacement in related to a client
engagement.
B. Being pressured to reduce inappropriately the
extent of work performed in order to reduce
fees.
C. Being threatened with litigation.
D. A member of the assurance team being, or
having recently been, a director or officer of
the client.

59.

Which of the following is an example of

engagement-specific safeguards in the work
environment?
A. Advising partners and professional staff of
those assurance clients and related entities
from which they must be independent.
B. Disclosing to those charged with governance
of the client the nature of service provided
and extent of fees charged.
C. A disciplinary mechanism to promote
compliance with the firms policies and
procedures.
D. Published policies and procedures to
encourage and empower staff to
communicate to senior levels within the firm
any issue relating to compliance with the
fundamental principles that concerns them.

60.

According to Section 240 of the Code of Ethics,

fees charged for assurance engagements should
be a fair reflection of the value of the work
involved. In determining professional fees, the
following should be taken into account, except
A. The time necessarily occupied by each person
engaged on the work.
B. The outcome or result of a transaction or the
result of the work performed.
C. The skill and knowledge required for the type
of work involved.
D. The level of training and experience of the
persons necessarily engaged on the work.

61.

In the case of audit engagements, it is in the

public interest and, therefore, required by the
Code that members of audit teams, firms and
network firms shall be independent of audit
clients. Independence requires
A. Independence of mind only.

Page 6 of 27

B.
C.
D.

Independence in appearance only.

Both independence of mind and
independence in appearance
Either independence of mind or independence
in appearance

62.

When the professional accountant determines that

appropriate safeguards are not available or cannot
be applied to eliminate the threats to
independence or reduce them to an acceptable
level, the professional accountant shall
I.
Eliminate the circumstance or relationship
creating the threats.
II. Decline or terminate the audit engagement.
A. I only
B. II only
C. Neither I nor II
D. Either I or II

63.

Financial interests may be held through an

intermediary (for example, a collective investment
vehicle, estate or trust). When control over the
investment vehicle or the ability to influence
investment decisions exists, the code defines that
financial interest to be a/an
A. Direct financial interest.
B. Material direct financial interest.
C. Indirect financial interest.
D. Material indirect financial interest.

64.

65.

66.

Holding a financial interest in an audit client may

create a self-interest threat. The existence and
significance of any threat created depends on
I.
The role of the person holding the financial
interest.
II. Whether the financial interest is direct or
indirect.
III. The materiality of the financial interest.
A. I and II only.
B. I and III only.
C. II and III only.
D. I, II, and III.
The concept of materiality is least important to an
auditor when considering the
A. Effects of a direct financial interest in the
client upon the auditors independence.
B. Decision whether to use positive or negative
confirmations of accounts receivable.
C. Adequacy of disclosure of a clients illegal act.
D. Discovery of weaknesses in a clients internal
control.

D.

material prior to the individual becoming a

member of the audit team.
Remove the member of the audit team from
the audit engagement.

67.

Jayson, CPA, was offered the engagement to audit

W Corporation for the year ended December 31,
2016. He had served as a director of W
Corporation until December 31, 2014, and his
spouse currently owns 6,000 of the 100,000
outstanding share capital of W Corporation.
Jayson disassociated from W Corporation prior to
being offered the engagement. Moreover, the
engagement does not cover any period that
includes Jaysons association or employment with
W Corporation. Under the code of ethics, Jayson
should
A. Accept the engagement.
B. Let a partner from the same office accept and
conduct the engagement.
C. Refuse the engagement because he had
served as a director.
D. Refuse the engagement because of his
spouses stock ownership.

68.

A loan, or guarantee of a loan, to the firm from an

audit client that is a bank or a similar institution,
would not create a threat to independence
provided
I.
II.
A.
B.
C.
D.

The loan, or guarantee, is made under normal

lending procedures, terms and requirements.
The loan is immaterial to both the firm
receiving the loan and the audit client.
I only
II only
Neither I nor II
Both I and II

69.

A close business relationship between a firm or a

member of the audit team, or a member of that
individuals immediate family, and the audit client
or its management may create
A. Self-interest and intimidation threats
B. Self-review and familiarity threats
C. Advocacy and self-review threats
D. Self-interest and self-review threats

70.

When an immediate family member of a member

of the assurance team is a director, an officer, or
an employee of the assurance client in a position
to exert direct and significant influence over the
subject matter information of the assurance
engagement, or was in such a position during the
period covered by the engagement, the threats to
independence can only be reduced to an
acceptable level by
A. Where possible, structuring the
responsibilities of the assurance team so that
the professional does not deal with matters
that are within the responsibility of the
immediate family member.
B. Withdrawing from the assurance
engagement.
C. Removing the individual from the assurance
team.
D. Discussing the issue with those charged with
governance, such as the audit committee.

A direct financial interest or a material indirect

financial interest in the audit client of a member
of the audit team or his immediate family member
may create a significant self-interest threat.
Which of the following safeguards would be least
likely considered to eliminate the threat or reduce
it to an acceptable level?
A. Discuss the matter with those charged with
governance of the audit client.
B. Dispose of the direct financial interest prior to
the individual becoming a member of the
audit team.
C. Dispose of the indirect financial interest in
total or dispose of a sufficient amount of it so
that the remaining interest is no longer

Page 7 of 27

C.
71.

72.

73.

74.

75.

Which of the following threats to independence is

created when a member of the assurance team
participates in the assurance engagement while
knowing, or having reason to believe, that he is
to, or may, join the assurance client sometime in
the future?
A. Intimidation threat
B. Self-interest threat
C. Self-review threat
D. Familiarity threat
Which of the following would not generally create
a threat to independence?
A. The purchase of goods and services from an
assurance client by the firm (or from a
financial statement audit client by a network
firm) or a member of the assurance team
provided that the transaction is in the normal
course of business and on an arms length
basis.
B. A partner or employee of the firm or a
network firm serves as Company Secretary
for a financial statement audit client.
C. Determining which recommendations of the
firm should be implemented.
D. Reporting, in a management role, to those
charged with governance.
The following forms of assistance to a financial
statement audit client do not generally threaten
the firms independence, except
A. Analyzing and accumulating information for
regulatory reporting.
B. Assisting in resolving account reconciliation
problems.
C. Authorizing or approving transactions.
D. Assisting in the preparation of consolidated
financial statements.
As defined in the Code, a valuation comprises the
making of assumptions with regard to future
developments, the application of certain
methodologies and techniques, and the
combination of both in order to compute a certain
value, or range of values, for an asset, a liability
or for a business as a whole. Which of the
following threats may be created when a firm or a
network firm performs valuation for an audit client
that is to be incorporated in the clients financial
statements?
A. Advocacy threat
B. Familiarity threat
C. Self-review threat
D. Intimidation threat
The following statements relate to the provision of
taxation, internal audit or IT Systems services to
audit clients. Which is false?
A. Preparing calculations of current and deferred
tax liabilities (or assets) for an audit client for
the purpose of preparing accounting entries
that will be subsequently audited by the firm
creates a self-interest threat.
B. A self-review threat may be created when a
firm, or network firm, provides internal audit
services to an audit client.

D.

The provision of services by a firm or network

firm to an audit client that involve the design
and implementation of financial information
technology systems that are used to generate
information forming part of a clients financial
statements may create a self-review threat.
The provision of services in connection with
the assessment, design, and implementation
of internal accounting controls and risk
management controls does not create a
threat to independence provided that firm or
network firm personnel do not perform
management functions.

76.

What threat to independence is created when the

litigation support services provided to an audit
client include the estimation of the possible
outcome and thereby affects the amounts or
disclosures to be reflected in the financial
statements?
A. Self-review threat
B. Advocacy threat
C. Intimidation threat
D. Familiarity threat

77.

The recruitment of senior management for an

assurance client, such as those in a position to
affect the subject matter of the assurance
engagement, may create the following current or
future threats to independence, except
A. Self-interest threat
B. Familiarity threat
C. Intimidation threat
D. Self-review threat

78.

When the total fees generated by an assurance

client represent a large proportion of a firms total
fees, the dependence on that client or client group
and concern about the possibility of losing the
client may create a/an
A. Self-interest threat
B. Self-review threat.
C. Intimidation threat
D. Advocacy threat

79.

What threat to independence may be created if

fees due from an assurance client for professional
services remain unpaid for a long time, especially
if a significant part is not paid before the issue of
the assurance report for the following year?
A. Advocacy threat
B. Self-interest threat
C. Intimidation threat
D. Self-review threat

80.

These are fees calculated on a predetermined

basis relating to the outcome or result of a
transaction or the result of the work performed.
A. Contingent fees
B. Fixed fees
C. Predetermined fees
D. Commissions.

81.

Which of the following threats to independence

may be created when litigation takes place, or

Page 8 of 27

appears likely, between the firm or a member of

the assurance team the assurance client?
A. Self-interest or advocacy threat
B. Advocacy or intimidation threat
C. Self-interest or intimidation threat
D. Familiarity or self-review threat
82.

As defined in the Code of Ethics, __________ is the

communication to the public of information as to
the services or skills provided by professional
accountants in public practice with a view to
procuring professional business.
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services

83.

As defined in the Code of Ethics, __________ is the

communication to the public of facts about a
professional accountant which are not designed
for the deliberate promotion of that professional
accountant.
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services

84.

Which of the following statements concerning

publicity is incorrect?
A. Booklets and other documents bearing the
name of a professional accountant and giving
technical information for the assistance of
staff or clients may be issued to such persons,
other professional accountants or other
interested parties.
B. Professional accountants who author books or
articles on professional subjects may state
their name and professional qualifications;
give the name of their organization; and give
any information as to the services that the
firm provides.
C. Appropriate newspapers or magazines may
be used to inform the public of the
establishment of a new practice, of changes
in the composition of a partnership of
professional accountants in public practice, or
of any alteration in the address of a practice.
D. A professional accountant may develop and
maintain a website in the Internet in such
suitable length and style which may also
include announcements, press releases,
publications and such other necessary and
factual information.

85.

The holding of media-covered events undertaken

only to commemorate a professional accountants
anniversaries in public practice does not violate
the rules on advertising and solicitation provided
that such undertaking should be done only every
_____ years of celebration.
A. 5
B. 10
C. 20
D. 25

86.

A professional accountant in public practice is

allowed to
A. Refer to, use or cite actual or purported
testimonials by third parties.
B. Publish services in billboard (e.g., tarpaulin,
streamers, etc.) advertisements.
C. Publish and compare fees with other CPAs or
CPA firms or compare those services with
those provided by another firm or CPA
practitioner.
D. Inform interested parties through any medium
that a partnership or salaried employment of
an accountancy nature is being sought.

87.

After evaluating the significance of the threat

created by an actual or threatened litigation, the
following safeguards should be applied to reduce
the threat to an acceptable level, except
A. Disclosing to the audit committee, or others
charged with governance, the extent and
nature of the litigation.
B. If the litigation involves a member of the
assurance team, removing that individual
from the assurance team.
C. Involving an additional professional
accountant in the firm who was not a member
of the assurance team to review the work or
otherwise advise as necessary.
D. Withdraw from, or refuse to accept, the
assurance engagement.

88.

When a firm obtains an assurance engagement at

a significantly lower fee level than that charged by
the predecessor firm, or quoted by other firms,
the self-interest threat created will not be reduced
to an acceptable level unless
I.
II.

A.
B.
C.
D.

The firm is able to demonstrate that

appropriate time and qualified staff are
assigned to the task.
All applicable assurance standards,
guidelines, and quality control procedures are
being complied with.
I only
II only
Both I and II
Neither I nor II

89.

What threat to independence may be created

when the fees generated by the assurance client
represent a large proportion of the revenue of an
individual of the firm?
A. Self-review threat
B. Familiarity threat
C. Self-interest threat
D. Advocacy threat

90.

The following statements relate to the provision of

legal services to an audit client. Which is
incorrect?

Page 9 of 27

A.

The provision of legal services to an audit

client involving matters that would not be
expected to have a material effect on the
financial statements may create a self-review
threat.

B.
C.

D.

91.

Legal services to support an audit client in the

execution of a transaction (e.g., contract
support) may create a self-review threat.
Acting for an audit client in the resolution of a
dispute or litigation in such circumstances
when the amounts involved are material in
relation to the financial statements of the
audit client would create advocacy and selfreview threats so significant no safeguards
could reduce the threats to an acceptable
level.
The appointment of a partner or an employee
of the firm or network firm as General
Counsel for legal affairs to an audit client
would create self-review and advocacy
threats that are so significant no safeguards
could reduce the threats to an acceptable
level.

When a close family member of a member of the

assurance team is a director, an officer, or an
employee of the assurance client in a position to
exert direct and significant influence over the
subject matter information of the assurance
engagement, threats to independence may be
created. If the threats are other than clearly
insignificant, which of the following safeguards
can be applied to reduce the threats to an
acceptable level?
I. Removing the individual from the assurance
team.
II. Where possible, structuring the responsibility
of the assurance team so that the
professional does not deal with matters that
are within the responsibility of the close
family member.
III. Policies and procedures to empower staff to
communicate to senior levels within the firm
any issue of independence and objectivity
that concerns them.
A.
B.
C.
D.

92.

93.

D.

94.

Self-interest, familiarity or intimidation threats

Self-review, familiarity, or advocacy threats
Advocacy, familiarity or self-review threats
Self-interest, advocacy or self-review threats

The following circumstances create advocacy

threats for a professional accountant in public
practice except
A. Promoting shares in an audit client.
B. Acting as an advocate on behalf of an audit
client in litigation or disputes with third
parties.

Acting as campaign manager for the

president of a client who is running for a
public office.
A member of the assurance team having a
significant close business relationship with an
assurance client.

Which of the following are elements of a CPA

firms quality control that should be considered in
establishing its quality control policies and
procedures?

A.
B.
C.
D.

Ethical
Requirements
Performance
No
Yes
Yes
No

Human Engagement
Resources
Yes
No
Yes
No

No
No
Yes
Yes

95.

The primary purpose of establishing quality

control policies and procedures for deciding
whether to accept a new client is to
A. Anticipate before performing any fieldwork
whether an unqualified opinion can be
expressed.
B. Enable the CPA firm to attest to the reliability
of the client.
C. Satisfy the CPA firms duty to the public
concerning the acceptance of new clients.
D. Minimize the likelihood of association with
clients whose management lacks integrity.

96.

As defined in PSQC 1, __________ is 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. Monitoring
B. Inspection
C. Engagement quality control review
D. Supervision

97.

Which element of a system of quality control is

addressed by the establishment of policies and
procedures designed to provide the firm with
reasonable assurance that it has sufficient
personnel with the competence, capabilities, and
commitment to ethical principles?
A. Monitoring
B. Leadership responsibilities for quality within
the firm
C. Human resources
D. Engagement performance

I and II only
II and III only
I and III only
I, II, and III

Which of the following threats to independence

may be created by family and personal
relationships between a member of the assurance
team and a director, an officer, or an employee of
the assurance client in a position to exert direct
and significant influence over the subject matter
information of the assurance engagement?
A.
B.
C.
D.

C.

98.

The nature, timing, and extent of an audit firms

quality control policies and procedures depend on
The Nature
Appropriate
The CPA
of the CPA CostBenefit
Firms Size
Firms Practice
Considerations
A.
Yes
Yes
No
B.
Yes
Yes
Yes

Page 10 of 27

C.
D.
99.

100.

No
Yes

No
No

No
Yes

For audits of financial statements of listed entities,

the engagement partner should not issue the
auditors report until the completion of the
A. Engagement Quality Control Review
B. Management Review
C. Engagement Team Review
D. Engagement Partner Review
Who should take responsibility for the overall
quality on each audit engagement?
A. Engagement quality control reviewer
B. Engagement partner
C. Engagement team
D. CPA firm

101.

The engagement partner should take

responsibility for the direction, supervision, and
performance of the audit engagement in
compliance with professional standards and
regulatory and legal requirements, and for the
auditors report that is issued to be appropriate in
the circumstances. Supervision includes the
following, except
A. Tracking the progress of the audit
engagement.
B. Addressing significant issues arising during
the audit engagement, considering their
significance, and modifying the planned
approach appropriately.
C. Informing the members of the engagement
team of their responsibilities.
D. Identifying matters for consultation or
consideration by more experienced
engagement team members during the audit
engagement.

102.

PSA 220 requires the engagement partner to

consider whether members of the engagement
team have complied with the ethical requirements
relating to audit engagements. The Code of
Ethics establishes the fundamental principles of
professional ethics, which include
I.
Integrity
II. Objectivity
III. Professional competence and due care
IV. Confidentiality
V. Professional behavior
A. I, II, IV, and V only
C.
I,
III, IV, and V only
B. II, III, IV, and V only
D.
I, II,
III, IV, and V

THE FINANCIAL STATEMENT AUDIT: CLIENT

ACCEPTANCE AND PLANNING
103.

C.
D.

The results of the internal control

questionnaire.
The contents of the management
representation letter.

104.

The auditor is required to determine three

different levels of materiality: (1) materiality for
the financial statements as a whole, (2)
performance materiality, and (3)
A. Overall materiality
B. Planning materiality
C. General materiality
D. Specific materiality

105.

Which of the following statements concerning

materiality is not correct?
A. When establishing the overall audit strategy,
the auditor shall determine materiality for the
financial statements as a whole.
B. If, in the specific circumstances of the entity,
there is one or more particular classes of
transactions, account balances or disclosures
for which misstatements of lesser amounts
than materiality for the financial statements
as a whole could reasonably be expected to
influence the economic decisions of users
taken on the basis of the financial
statements, the auditor shall also determine
the materiality level or levels to those
particular classes of transactions, account
balances or disclosures.
C. Determining materiality involves the exercise
of professional judgment.
D. The materiality level for the financial
statements as a whole determined in the
planning stage of the audit should not be
affected by changes in the circumstances of
the engagement.

106.

Analytical procedures used in planning an audit

should focus on
A. Reducing the scope of tests of controls and
substantive tests.
B. Providing assurance that potential material
misstatements will be identified.
C. Enhancing the auditors understanding of the
clients business and identifying areas of
potential risk.
D. Assessing the adequacy of the available
evidential matter.

107.

Which of the following would not be considered an

analytical procedure?
A. Estimating payroll expense by multiplying the
number of employees by the average hourly
wage rate and the total hours worked.
B. Projecting an error rate by comparing the
results of a statistical sample with the actual
population characteristics.
C. Computing accounts receivable turnover by
dividing credit sales by the average net
receivables.

Which of the following would an auditor most

likely use in determining the auditors preliminary
judgment about materiality?
A. The anticipated sample size of the planned
substantive tests.
B. The entitys annualized interim financial
statements.

Page 11 of 27

D.
108.

109.

110.

111.

112.

Developing the expected sales based on the

sales trend of the prior five years.

Which of the following auditing procedures most

likely would assist an auditor in identifying related
party transactions?
A. Inspecting correspondence with lawyers for
evidence of unreported contingent liabilities.
B. Vouching accounting records for recurring
transactions recorded just after the balance
sheet date.
C. Reviewing confirmations of loans receivable
and payable for indications of guarantees.
D. Performing analytical procedures for
indications of possible financial difficulties.
Which of the following most likely would indicate
the existence of related parties?
A. Writing down obsolete inventory just before
year-end.
B. Failing to correct previously identified internal
control deficiencies.
C. Depending on a single product for the success
of the entity.
D. Borrowing money at an interest rate
significantly below the market rate.
Which of the following is an incorrect statement
concerning the relationship of the internal auditor
and the scope of the external audit of an entitys
financial statements?
A. The external auditor is not required to give
consideration to the internal audit function
beyond obtaining a sufficient understanding
to identify and assess the risks of material
misstatement of the financial statements and
to design and perform further audit
procedures.
B. The internal auditors may determine the
extent to which audit procedures should be
employed by the external auditor.
C. Under certain circumstances, the internal
auditors may assist the external auditor in
performing substantive tests and tests of
controls.
D. The nature, timing, and extent of the external
auditors substantive tests may be affected
by the work of internal auditors.
If the results of the auditors experts work do not
provide sufficient appropriate audit evidence or
are not consistent with other audit evidence, the
auditor should
A. Report the matter to the appropriate
regulatory agency of the government.
B. Resolve the matter.
C. Withdraw from the engagement.
D. Express an unqualified opinion with reference
to the work of the expert.

B.
C.
D.

Conditions requiring special attention, such as

the existence of related parties.
The setting of materiality levels for audit
purposes.
All of the above.

RISK ASSESSMENTS AND INTERNAL CONTROL

113.

A measure of how willing the auditor is to accept

that the financial statements may be materially
misstated after the audit is completed and an
unmodified opinion has been issued is the
A. Inherent risk.
B. Acceptable audit risk.
C. Control risk.
D. Detection risk.

114.

When inherent risk is high, there will need to be

A lower
More evidence

A.
B.
C.
D.

assessment of audit risk.

accumulated by the auditor.
Yes
No
Yes
No

Yes
No
No
Yes

115.

Which of the following is not one of the three

primary objectives of effective internal control?
A. Reliability of financial reporting.
B. Efficiency and effectiveness of operations.
C. Compliance with laws and regulations.
D. Assurance of elimination of business risk.

116.

Which of the following are considered control

environment elements?
Commitment
Detection
Organizational
to Competence
Risk
Structure
A.
No
Yes
No
B.
Yes
Yes
Yes
C.
Yes
No
Yes
D.
No
No
Yes

117.

Which of the following statements concerning the

relevance of various types of controls to a
financial statement audit is correct?
A. All controls are ordinarily relevant to a
financial statement audit.
B. Controls over safeguarding of assets and
liabilities are of primary importance, while
controls over the reliability of financial
reporting may also be relevant.
C. Controls over the reliability of financial
reporting are ordinarily most directly relevant
to a financial statement audit, but other
controls may also be relevant.
D. An auditor may ordinarily ignore a
consideration of controls when a substantive
audit approach is taken.

Which of the following matters should be

considered by the auditor in developing the
overall audit strategy?
A. Important characteristics of the entity, its
business, its financial performance and its
reporting requirements including changes
since the date of the prior audit.

Page 12 of 27

C.
118.

119.

120.

121.

122.

An auditor should consider two key issues when

obtaining an understanding of a clients internal
controls. These issues are
A. The effectiveness and efficiency of the
controls.
B. The frequency and effectiveness of the
controls.
C. The design and implementation of the
controls.
D. The implementation and efficiency of the
controls.
Authorizations can be either general or specific.
Which of the following is not an example of a
general authorization?
A. Automatic reorder points for raw materials
inventory.
B. A sales managers authorization for a sales
return.
C. Credit limits for various classes of
transactions.
D. A sales price list for merchandise.
An auditor should obtain sufficient knowledge of
an entitys information system, including the
related business processes relevant to financial
reporting, to understand the
A. Policies used to detect the concealment of
fraud.
B. Process used to prepare significant
accounting estimates.
C. Safeguards used to limit access to computer
facilities.
D. Procedures used to assure proper
authorization of transactions.
Which of the following controls most likely would
provide reasonable assurance that all credit sales
transactions of an entity are recorded?
A. The accounting department supervisor
controls the mailing of monthly statements to
customers and investigates any differences
reported by customers.
B. The accounting department supervisor
independently reconciles, on a monthly basis,
the accounts receivable subsidiary ledger to
the accounts receivable control account.
C. The billing department supervisor matches
prenumbered shipping documents with
entries in the sales journal.
D. The billing department supervisor sends
copies of approved sales orders to the credit
department for comparison to authorized
credit limits and current customer account
balances.

D.

Daily sales summaries are compared to daily

postings to the accounts receivable ledger.
Each sales invoice is supported by a
prenumbered shipping document.

123.

Which of the following controls is not usually

performed in the accounts payable department?
A. Indicating on the voucher the affected asset
and expense accounts to be debited.
B. Approving vouchers for payment by having an
authorized employee sign the vouchers.
C. Accounting for unused prenumbered purchase
orders and receiving reports.
D. Matching the vendors invoice with the
related purchase requisition, purchase order,
and receiving report.

124.

Which of the following is of least concern to an

auditor in assessing the risks of material
misstatement?
A. Signed checks are distributed by the
controller to approved payees.
B. Checks are signed by one person.
C. Cash receipts are not deposited intact daily.
D. Treasurer does not verify the names and
addresses of check payees.

125.

Your client, a merchandising concern, has annual

sales of P30,000,000 and a 40% gross profit rate.
Tests reveal that 2% of the peso amount of
purchases do not get into inventory because of
breakage and inventory pilferage by employees.
The company estimates that these losses could be
reduced to 0.5% of purchases by designing and
implementing certain controls costing
approximately P350,000. Should the controls be
designed and implemented?
A. Yes, regardless of cost-benefit considerations,
because the situation involves employee
theft.
B. Yes, because the ideal system of internal
control is the most extensive one.
C. No, because the cost of designing and
implementing the added controls exceeds the
projected savings.
D. Yes, because the expected benefits to be
derived exceed the cost of the added
controls.

126.

After gaining an understanding of internal control

and assessing the risks of material misstatement,
an auditor decided to perform tests of controls.
The auditor most likely decided that
A. Additional evidence to support a further
reduction in control risk is not available.
B. It is not possible or practicable to reduce the
risks of material misstatement at the
assertion level to an acceptably low level with
audit evidence obtained only from
substantive test procedures.
C. There were many internal control weaknesses
that could allow misstatements to enter the
accounting system.
D. An increase in the assessed level of control
risk is justified for certain financial statement
assertions.

Which of the following control activities in an

entitys revenue/receipt cycle would provide
reasonable assurance that all billed sales are
correctly posted to the accounts receivable
ledger?
A. Each shipment of goods on credit is
supported by a prenumbered sales invoice.
B. The accounts receivable subsidiary ledger is
reconciled daily to the accounts receivable
control account in the general ledger.

Page 13 of 27

127.

128.

129.

An auditor may decide to assess control risk at the

maximum level for certain assertions because the
auditor believes
A. Controls are unlikely to pertain to the
assertions.
B. The entitys control components are
interrelated.
C. Sufficient appropriate audit evidence to
support the assertions is likely to be available.
D. More emphasis on tests of controls than
substantive tests is warranted.
Which of the following statements is correct
concerning an auditors assessment of control
risk?
A. Assessing control risk may be performed
concurrently during an audit with obtaining an
understanding of the entitys internal control.
B. Evidence about the operation of controls in
prior audits may not be considered during the
current years assessment of control risk.
C. The basis for an auditors conclusions about
the assessed level of control risk need not be
documented unless control risk is assessed at
the maximum level.
D. The lower the assessed level of control risk,
the less assurance the evidence must provide
that the controls are operating effectively.
According to PSA 330 (The Auditors Procedures in
Response to Assessed Risks), an auditor who
plans to rely on controls that have not changed
since they were last tested should test the
operating effectiveness of such controls at least
once every
A. Second audit
B. Third audit
C. Fourth audit
D. Fifth audit

130.

In performing tests of the operating effectiveness

of an entitys controls, an auditor selects from a
variety of techniques, including
A. Reperformance and observation.
B. Inquiry and analytical procedures.
C. Comparison and confirmation.
D. Inspection and verification.

131.

An auditor intends to perform tests of control on a

clients cash disbursements procedures. If the
control procedures leave no audit trail of
documentary evidence, the auditor most likely will
test the procedures by
A. Inquiry and analytical procedures.
B. Inquiry and observation.
C. Analytical procedures and confirmation.
D. Confirmation and observation.

C.
D.
133.

Compare the accounts receivable ledger to

daily sales summaries.
Inspect unused sales invoices for consecutive
prenumbering.

When there are numerous property and

equipment transactions during the year, an
auditor who plans to assess control risk at a low
level usually performs
A. Tests of controls and extensive tests of
property and equipment balances at the end
of the year.
B. Analytical procedures for current year
property and equipment transactions.
C. Tests of controls and limited tests of current
year property and equipment transactions.
D. Analytical procedures for property and
equipment balances at the end of the year.

FRAUD AND ERROR

134.

Misstatements in the financial statements can

arise from fraud or error. The distinguishing factor
between fraud and error is whether the underlying
action that results in the misstatement of the
financial statements is
I.
Intentional or unintentional.
II. Rational or irrational.
A. I only
C.

B.

Both I and II
II only

D.

Neither I nor II.

135.

Error includes
A. Engaging in complex transactions that are
structured to misrepresent the financial
position or financial performance of the entity.
B. Concealing, or not disclosing, facts that could
affect the amounts recorded in the financial
statements.
C. An incorrect accounting estimate arising from
oversight or misinterpretation of facts.
D. Intentional misapplication of accounting
policies relating to amounts, classification,
manner of presentation, or disclosure.

136.

Fraud involving one or more members of

management or those charged with governance is
referred to as
A. Management fraud.
C.

B.

Fraudulent financial reporting.

Employee fraud.

D.

Misappropriation of assets.
132.

Which of the following tests of controls most likely

would help assure an auditor that goods shipped
are properly billed?
A. Scan the sales journal for sequential and
unusual entries.
B. Examine shipping documents for matching
sales invoices.

137.

Page 14 of 27

The auditor is concerned with fraud that causes a

material misstatement in the financial statements.
There are two types of intentional misstatements
that are relevant to the auditor: misstatements
resulting from fraudulent financial reporting and
misstatements resulting from
A. Management fraud.
B. Employee fraud.

C.
D.

Misappropriation of assets.
Collusion within the entity or with third
parties.

the auditor may identify events or conditions that

indicate an incentive or pressure to commit fraud
or provide an opportunity to commit fraud. Such
events or conditions are referred to as
A. Fraud conditions.
C.

B.
138.

139.

140.

141.

142.

Fraudulent financial reporting involves intentional

misstatements including omissions of amounts or
disclosures in financial statements to deceive
financial statement users. It may be
accomplished in a number of ways, including
A. Embezzling receipts.
B. Stealing physical assets or intellectual
property.
C. Using an entitys assets for personal use.
D. Manipulation, falsification, or alteration of
accounting records or supporting
documentation from which the financial
statements are prepared.
Which of the following conditions are generally
present when misstatements due to fraud occur?
I.
Incentive or pressure.
II. Perceived opportunity.
III. Rationalization.
A. I and II only.
C.
I
and III only.
B. II and III only.
D.
I, II,
and III.
The primary responsibility for the prevention and
detection of fraud rests with
A. Those charged with governance of the entity.
B. Management of the entity.
C. Both those charged with governance of the
entity and management.
D. The auditor.
Which of the following statements best describes
an auditors responsibility regarding
misstatements?
A. An auditor should obtain reasonable
assurance that the financial statements taken
as a whole are free from material
misstatement, whether caused by fraud or
error.
B. An auditor should obtain absolute assurance
that material misstatements in the financial
statements will be detected.
C. An auditor is responsible to detect material
errors but has no responsibility to detect
material fraud that is concealed through
employee collusion or management override
of internal control.
D. An auditors failure to detect a material
misstatement resulting from fraud is an
indication of noncompliance with the
requirements of the Philippine Standards on
Auditing (PSAs).

Fraudulent activities.
Fraud risk factors.

D.

Fraud environment.
143.

The following are examples of fraud risk factors

relating to misstatements arising from
misappropriation of assets, except
A. Recurring negative cash flows from operating
activities while reporting earnings and
earnings growth.
B. Inadequate physical safeguards over cash,
investments, inventory, or fixed assets.
C. Inadequate segregation of duties or
independent checks.
D. Adverse relationship between the entity and
employees with access to cash or other
assets susceptible to theft created by recent
changes made to employee compensation or
benefit plans.

144.

Opportunities to misappropriate assets increase

when there are
A. Known or anticipated future employee layoffs.
B. Promotions, compensation, or other rewards
inconsistent with expectations.
C. Recent or anticipated changes to employee
compensation or benefit plans.
D. Inventory items that are small in size, of high
value, or in high demand.

145.

Which of the following conditions or events may

create incentives/pressures to commit fraud?
A. Inadequate system of authorization and
approval of transactions.
B. Lack of mandatory vacations for employees
performing key control functions.
C. Excessive pressure on management or
operating personnel to meet financial targets
established by those charged with
governance, including sales or profitability
incentive goals.
D. Inadequate access controls over automated
records.

146.

Because of the risk of material misstatement, an

audit of financial statements in accordance with
PSAs should be planned and performed with an
attitude of
A. Impartial conservatism.
B. Objective judgment.
C. Independent integrity.
D. Professional skepticism.

147.

When planning the audit, the auditor should make

inquiries of management. Such inquiries should
address the following, except
A. Managements assessment of the risk that
the financial statements may be misstated
due to fraud.

When obtaining an understanding of the entity

and its environment, including its internal control,

Page 15 of 27

B.
C.

D.

148.

Managements process for identifying and

responding to the risks of fraud in the entity.
Managements consideration of how an
element of unpredictability will be
incorporated into the nature, timing, and
extent of the audit procedures to be
performed.
Managements communication, if any, to
those charged with governance regarding its
processes for identifying and responding to
the risks of fraud in the entity.

149.

The use of a computer changes the processing,

storage, and communication of financial
information. A CIS environment may affect the
following, except
A. The accounting and internal control systems
of the entity.
B. The overall objective and scope of an audit.
C. The auditors design and performance of tests
of control and substantive procedures to
satisfy the audit objectives.
D. The specific procedures to obtain knowledge
of the entitys accounting and internal control
systems.

150.

The following are benefits of using IT-based

controls, except
A. Ability to process large volume of
transactions.
B. Over-reliance on computer-generated reports.
C. Ability to replace manual controls with
computer-based controls.
D. Reduction in misstatements due to consistent
processing of transactions.

Which of the following statements concerning the

Internet is incorrect?
A. The Internet is a shared public network that
enables communication with other entities
and individuals around the world.
B. The Internet is a private network that only
allows access to authorized persons or
entities.
C. The Internet is interoperable, which means
that any computer connected to the Internet
can communicate with any other computer
connected to the Internet.

The Internet is a worldwide network that

allows entities to engage in e-commerce/ebusiness activities.

152.

In planning the portions of the audit which may be

affected by the clients CIS environment, the
auditor should obtain an understanding of the
significance and complexity of the CIS activities
and the availability of data for use in the audit.
The following relate to the complexity of CIS
activities except when
A. Transactions are exchanged electronically
with other organizations (for example, in
electronic data interchange systems [EDI]).
B. Complicated computations of financial
information are performed by the computer
and/or material transactions or entries are
generated automatically without independent
validation.
C. Material financial statement assertions are
affected by the computer processing.
D. The volume of transactions is such that users
would find it difficult to identify and correct
errors in processing.

153.

The auditor shall consider the entitys CIS

environment in designing audit procedures to
reduce risk to an acceptably low level. Which of
the following statements is incorrect?
A. The auditors specific audit objectives do not
change whether financial information is
processed manually or by computer.
B. The methods of applying audit procedures to
gather audit evidence are not influenced by
the methods of computer processing.
C. The auditor may use either manual audit
procedures, computer-assisted audit
techniques (CAATs), or a combination of both
to obtain sufficient appropriate audit
evidence.
D. In some CIS environments, it may be difficult
or impossible for the auditor to obtain certain
data for inspection, inquiry, or confirmation
without the aid of a computer.

154.

A characteristic that distinguishes computer

processing from manual processing is
A. The potential for systematic error is ordinarily
greater in manual processing than in
computerized processing.
B. Errors or fraud in computer processing will be
detected soon after their occurrences.
C. Most computer systems are designed so that
transaction trails useful for audit purposes do
not exist.
D. Computer processing virtually eliminates the
occurrence of computational errors normally
associated with manual processing.

155.

Which of the following statements most likely

represents a disadvantage for an entity that
maintains data files on personal computers (PCs)
rather than manually prepared files?
A. It is usually more difficult to compare
recorded accountability with the physical
count of assets.

When the auditor identifies a misstatement in the

financial statements, the auditor should consider
whether such a misstatement may be indicative of
fraud and if there is such an indication, the auditor
should
A. Consider the implications of the misstatement
in relation to other aspects of the audit.
B. Withdraw from the engagement.
C. Communicate the information to regulatory
and enforcement authorities.
D. Report the matter to the person or persons
who made the audit appointment.

AUDITING IN A CIS/IT ENVIRONMENT

151.

D.

Page 16 of 27

B.

Random error associated with processing

similar transactions in different ways is
usually greater.
C. Attention is focused on the accuracy of the
programming process rather than errors in
individual transactions.
D. It is usually easier for unauthorized persons to
access and alter the files.

156.The internal controls over computer processing

include both manual procedures and procedures
designed into computer programs (programmed
control procedures). These manual and
programmed control procedures comprise the
general CIS controls and CIS application controls.
The purpose of general CIS controls is to
A. Establish specific control procedures over the
accounting applications in order to provide
reasonable assurance that all transactions are
authorized and recorded and are processed
completely, accurately, and on a timely basis.
B. Establish a framework of overall controls over
the CIS activities and to provide a reasonable
level of assurance that the overall objectives
of internal control are achieved.
C. Provide reasonable assurance that systems
are developed and maintained in an
authorized and efficient manner.
D. Provide reasonable assurance that access to
data and computer programs is restricted to
authorized personnel.
157.

158.

159.

An entity has recently converted its purchasing

cycle from a manual process to an online
computer system. Which of the following is a
probable result associated with conversion to the
new IT system?
A. Traditional duties are less separated.
B. Increased processing time.
C. Reduction in the entitys risk exposure.
D. Increased processing errors.
An entity should plan the physical location of its
computer facility. Which of the following is the
primary consideration for selecting a computer
site?
A. It should be in the basement or on the ground
floor.
B. It should maximize the visibility of the
computer.
C. It should minimize the distance that data
control personnel must travel to deliver data
and reports and be easily accessible by a
majority of company personnel.
D. It should provide security.
An entity installed antivirus software on all its
personal computers. The software was designed
to prevent initial infections, stop replication
attempts, detect infections after their occurrence,
mark affected system components, and remove
viruses from infected components. The major risk
in relying on antivirus software is that it may
A. Consume too many system resources.
B. Interfere with system operations.

C.
D.

Not detect certain viruses.

Make software installation too complex.

AUDIT OBJECTIVES, PROCEDURES,EVIDENCE, AND

DOCUMENTATION
160.

Which of the following should be considered by

the auditor in deciding which means (or
combination of means) to use in selecting items
for testing?
I.
The risk of material misstatement related to
the assertion being tested.
II. Audit efficiency.
A. I only
C.

B.

Both I and II
II only

D.

Neither I nor II
161.

The quantity of audit evidence needed is affected

by the risk of misstatement and also by the
quality of such audit evidence.
The reliability of audit evidence is influenced by its
source and by its nature and is dependent on the
individual circumstances under which it is
obtained.
A.

Both statements are true.

C.

B.

True; False.
Both statements are false.

D.

False; True.
162.

Which of the following is a false statement about

audit objectives?
A. There should be a one-to-one relationship
between audit objectives and procedures.
B. Audit objectives should be developed in light
of management assertions about the financial
statement components.
C. Selection of tests to meet audit objectives
should depend upon the understanding of
internal control.
D. The auditor should resolve any substantial
doubt about any of managements material
financial statement assertions.

163.

Which of the following statements concerning

evidential matter is true?
A. Appropriate evidence supporting
managements assertions should be
convincing rather than merely persuasive.
B. Effective internal control contributes little to
the reliability of the evidence created within
the entity.
C. The cost of obtaining evidence is not an
important consideration to an auditor in
deciding what evidence should be obtained.
D. A clients accounting records cannot be
considered sufficient evidence to support the
financial statements.

164.

Which of the following types of audit evidence is

the most persuasive?

Page 17 of 27

A.
B.
C.
D.
165.

Prenumbered purchase order forms.

Client worksheets supporting cost allocations.
Bank statements obtained from the client.
Client representation letter.

Which of the following generalizations does not

relate to the appropriateness of evidence?
A. Audit evidence from external sources (for
example, confirmation received from a third
party) is more reliable than that generated
internally.
B. An auditors opinion, to be economically
useful, is formed within reasonable time and
based on evidence obtained at a reasonable
cost.
C. Audit evidence generated internally is more
reliable when the related accounting and
internal control systems are effective.
D. Audit evidence obtained directly by the
auditor is more reliable than that obtained
from the entity.

166.

Each of the following might, by itself, form a valid

basis for an auditor to decide to omit a test except
for the
A. Difficulty and expense involved in testing a
particular item.
B. Assessment of control risk at a low level.
C. Inherent risk involved.
D. Relationship between the cost of obtaining
evidence and its usefulness.

167.

In which of the following circumstances would the

use of the negative form of accounts receivable
confirmation most likely be justified?
A. A substantial number of accounts may be in
dispute and the accounts receivable balance
arises from sales to a few major customers.
B. A substantial number of accounts may be in
dispute and the accounts receivable balance
arises from sales to many customers with
small balances.
C. A small number of accounts may be in
dispute and the accounts receivable balance
arises from sales to a few major customers.
D. A small number of accounts may be in
dispute and the accounts receivable balance
arises from sales to many customers with
small balances.

168.

Which of the following statements is correct

concerning the use of negative confirmation
requests?
A. Unreturned negative confirmation requests
rarely provide significant explicit evidence.
B. Negative confirmation requests are effective
when detection risk is low.
C. Unreturned negative confirmation requests
indicate that alternative procedures are
necessary.
D. Negative confirmation requests are effective
when understatements of account balances
are suspected.

169.

Which of the following most likely would give the

most assurance concerning the valuation and
allocation assertion of accounts receivable?

A.
B.
C.
D.

Vouching amounts in the subsidiary ledger to

details on shipping documents.
Comparing receivable turnover ratios with
industry statistics for reasonableness.
Inquiring about receivables pledged under
loan agreements.
Assessing the allowance for uncollectible
accounts for reasonableness.

170.

Confirmation is the process of obtaining and

evaluating a direct communication from a third
party in response to a request for information
about a particular item affecting financial
statement assertions. Two assertions for which
confirmation of accounts receivable balances
provides primary evidence are
A. Completeness and valuation
B. Valuation and rights and obligations
C. Rights and obligations and existence
D. Existence and completeness

171.

To gain assurance that all inventory items in a

clients inventory listing schedule are valid, an
auditor most likely would vouch
A. Inventory tags noted during the auditors
observation to items listed in the inventory
listing schedule.
B. Inventory tags noted during the auditors
observation to items listed in receiving
reports and vendors invoices.
C. Items listed in the inventory listing schedule
to inventory tags and the auditors recorded
count sheets.
D. Items listed in receiving reports and vendors
invoices to the inventory listing schedule.

172.

An auditor selected items for test counts while

observing a clients physical inventory. The
auditor then traced the test counts to the clients
inventory listing. This procedure most likely
obtained evidence concerning managements
assertion of
A. Rights and obligations
C.

B.

Existence
Completeness

D.

Valuation
173.

Page 18 of 27

Which of the following is an audit procedure that

an auditor most likely would perform concerning
litigation, claims, and assessments?
A. Request the clients lawyer to evaluate
whether the clients pending litigation, claims,
and assessments indicate a going concern
problem.
B. Examine the legal documents in the clients
lawyers possession concerning litigation,
claims, and assessments to which the lawyer
has devoted substantive attention.
C. Discuss with management its policies and
procedures adopted for evaluating and
accounting for litigation, claims, and
assessments.
D. Confirm directly with the clients lawyer that
all litigation, claims, and assessments have

been recorded or disclosed in the financial

statements.

C.
D.

174.Which of the following is not an audit procedure that

the independent auditor would perform with
respect to litigation, claims, and assessments?
A. Inquire of and discuss with management the
policies and procedures adopted for litigation,
claims, and assessments.
B. Obtain from management a description and
evaluation of litigation, claims, and
assessments that existed at the balance
sheet date.
C. Obtain assurance from management that if
has disclosed all unasserted claims that the
lawyer has advised are probable of assertion
and must be disclosed.
D. Confirm directly with the clients lawyer that
all claims have been recorded in the financial
statements.
The following are ordinarily excluded from audit
documentation:
A
B
C
D
Superseded drafts of working papers and financial
statements
Yes
No
No
Yes
Notes that reflect incomplete or preliminary
thinking Yes
Yes
No
No
Previous copies of documents corrected for
typographical or other errors
Yes
Yes
Yes
Yes
Duplicates of documents
Yes
No
Yes
No

179.

Audit documentation may be recorded on paper or

on electronic or other media. The following are
examples of audit documentation, except
A. Audit programs
B. Letters of confirmation and representation
C. Correspondence (including e-mail) concerning
significant matters
D. The entitys accounting records

177.

The completion of the assembly of the final audit

file after the date of the auditors report does not
ordinarily involve
A. The performance of new audit procedures or
the drawing of new conclusions.
B. Sorting, collating and cross-referencing
working papers.
C. Deleting or discarding superseded
documentation.
D. Signing off on completion checklists relating
to the file assembly process.

Population, as defined in PSA 530, means the

entire set of data from which a sample is selected
and about which the auditor wishes to draw
conclusions. It is important for the auditor to
ensure that the population is
I.
II.

Appropriate to the objective of the audit

procedure.
Complete.

A.

I only

C.

B.

Both I and II
II only

D.

Neither I nor II
180.

An advantage of statistical over nonstatistical

sampling methods in tests of controls is that the
statistical methods
A. Afford greater assurance than a nonstatistical
sample of equal size.
B. Provide an objective basis for quantitatively
evaluating sampling risks.
C. Can more easily convert the sample into a
dual-purpose test useful for substantive
testing.
D. Eliminate the need to use judgment in
determining appropriate sample sizes.

181.

Which of the following best illustrates the concept

of sampling risk?
A. A randomly chosen sample may not be
representative of the population as a whole
on the characteristic of interest.
B. An auditor may select audit procedures that
are not appropriate to achieve the specific
objective.
C. An auditor may fail to recognize errors in the
documents examined for the chosen sample.
D. The documents related to the chosen sample
may not be available for inspection.

182.

Which of the following statistical selection

techniques is least desirable for use by an
auditor?
A. Systematic selection

175.

176.

Application of audit procedures to all items

that comprise a class of transactions or an
account balance.
Application of audit procedures to all items
over a certain amount and those that are
unusual or have a history of error.

B.

Block selection
Stratified selection

C.

D.

Sequential selection
AUDIT SAMPLING
178.

183.

Audit sampling involves the

A. Selection of all items over a certain amount.
B. Application of audit procedures to less than
100% of items within a class of transactions
or an account balance such that all items
have a chance of selection.

Page 19 of 27

Which of the following combinations results in a

decrease in sample size in a sample for
attributes?
Risk of
Expected
assessing
Tolerable
population

control risk too low

deviation rate
A.
Increase
Decrease
Increase
B.
Decrease
Increase
Decrease
C.
Increase
Increase
Decrease
D.
Increase
Increase
Increase
184.

rate

A.
B.
C.
D.
187.

The diagram below depicts the auditors

estimated maximum deviation rate compared with
the tolerable rate and also depicts the true
population deviation rate compared with the
tolerable rate.
True State of Population
Auditors
Estimate
Based on
Sample ResultsTolerable Rate
Tolerable Rate

Deviation Rate
Deviation Rate
Is less than
Exceeds

186.

Analytical procedures performed in the overall

review stage of an audit suggest that several
accounts have unexpected relationships. The
results of these procedures most likely indicate
that

D.

188.

Which of the following events most likely indicates

the existence of related parties?
A. Making a loan without scheduled terms for
repayment of the funds.
B. Discussing merger terms with a company that
is a major competitor.
C. Selling real estate at a price that differs
significantly from its book value.
D. Borrowing a large sum of money at a variable
rate of interest.

189.

An auditor searching for related party transactions

should obtain an understanding of each
subsidiarys relationship to the total entity
because
A. This may permit the audit of intercompany
account balances to be performed as of
concurrent dates.
B. This may reveal whether particular
transactions would have taken place if the
parties had not been related.
C. The business structure may be deliberately
designed to obscure related party
transactions.
D. Intercompany transactions may have been
consummated on terms equivalent to armslength transactions.

190.

After determining that a related party transaction

has, in fact, occurred, an auditor should
A. Obtain an understanding of the business
purpose of the transaction.
B. Substantiate that the transaction was
consummated on terms equivalent to an
arms-length transaction.
C. Add a separate paragraph to the auditors
report to explain the transaction.
D. Perform analytical procedures to verify
whether similar transactions occurred, but
were not recorded.

191.

As used in PSA 560 (Subsequent Events), the term

subsequent events refers to
I.
Events occurring between the date of the
financial statements and the date of the
auditors report.

COMPLETING THE AUDIT AND POST-AUDIT

RESPONSIBILITIES
Analytical procedures used in the overall review
stage of the audit generally include
A. Retesting controls that appeared to be
ineffective during the assessment of control
risk.
B. Considering unusual or unexpected account
balances that were not previously identified.
C. Gathering evidence concerning account
balances that have not changed from the
prior year.
D. Performing tests of transactions to
corroborate managements financial
statement assertions.

Both I and II.

II only.
Neither I nor II.

As a result of tests of controls, the auditor

assesses control risk higher than necessary and
thereby increases substantive testing. This is
illustrated by
A. I
C.
III
B. II
D.
IV

185.

The auditor should review information provided by

those charged with governance and management
identifying
I.
The names of all known related parties.
II. Related party transactions.
A. I only.
C.

B.

Maximum
Deviation Rate I.
III.
Is Less than
Tolerable Rate
Maximum
Deviation RateII.
IV.
Exceeds
Tolerable Rate

The communication with the audit committee

should be revised.
Irregularities exist among the relevant
account balances.
Additional substantive tests of details are
required.
Internal control activities are not operating
effectively.

Page 20 of 27

II.
A.
B.
C.
D.

Facts discovered after the date of the

auditors report.
I only.
II only.
Both I and II.
Neither I nor II.

A.
B.
C.

192.Which of the following statements best describes the

date of the financial statements?
A. The date on which those with the recognized
authority assert that they have prepared the
entitys complete set of financial statements,
including the related notes, and that they
have taken responsibility for them.
B. The date that the auditors report and audited
financial statements are made available to
third parties.
C. The date of the end of the latest period
covered by the financial statements, which is
normally the date of the most recent balance
sheet in the financial statements subject to
audit.
D. The date on which the auditor has obtained
sufficient appropriate audit evidence on which
to base the opinion on the financial
statements.
193.

194.

195.

Which of the following procedures would an

auditor most likely perform to obtain evidence
about the occurrence of subsequent events?
A. Inquiring as to whether any unusual
adjustments were made after the date of the
financial statements.
B. Confirming a sample of material accounts
receivable established after the date of the
financial statements.
C. Comparing the financial statements being
reported on with those of the prior period.
D. Investigating personnel changes in the
accounting department occurring after the
date of the financial statements.
Which of the following statements best expresses
the auditors responsibility with respect to facts
discovered after the date of the auditors report
but before the date the financial statements are
issued?
A. The auditor should amend the financial
statements.
B. If the facts discovered will materially affect
the financial statements, the auditor should
issue a new report which contains either a
qualified opinion or an adverse opinion.
C. The auditor should consider whether the
financial statements need amendment,
discuss the matter with management, and
consider taking actions appropriate in the
circumstances.
D. The auditor should withdraw from the
engagement.

D.

196.

Final determinations or resolutions are made

of contingencies that had been disclosed in
the financial statements.
Information about an event that occurred
after the date of the auditors report comes to
the auditors attention.
The control environment changes after
issuance of the report.
Information, which existed at the report date
and may affect the report, comes to the
auditors attention.

Which of the following events occurring after the

issuance of an auditors report most likely would
cause the auditor to make further inquiries about
the previously issued financial statements?
A. A technological development that could affect
the entitys future ability to continue as a
going concern.
B. The entitys sale of a subsidiary that accounts
for 30% of the entitys consolidated sales.
C. The discovery of information regarding a
contingency that existed before the financial
statements were issued.
D. The final resolution of a lawsuit disclosed in
the notes to the financial statements.

197.PSA 570 (Going Concern) states that a fundamental

principle in the preparation of financial statements
is the going concern assumption. Under this
assumption, an entity is ordinarily viewed as
continuing in business for the foreseeable future
with neither the intention nor the necessity of
liquidation, ceasing trading or seeking protection
from creditors pursuant to laws and regulations.
The responsibility to make an assessment of an
entitys ability to continue as a going concern
rests with the
A. Auditor
B. Entitys management
C. SEC
D. Entitys creditors
198.

After issuing a report, an auditor has no obligation

to make continuing inquiries or perform other
procedures concerning the audited financial
statements, unless

Page 21 of 27

Which of the following statements best describes

the auditors responsibility concerning the
appropriateness of the going concern assumption
in the preparation of the financial statements?
A. The auditors responsibility is to make a
specific assessment of the entitys ability to
continue as a going concern.
B. The auditors responsibility is to predict future
events or conditions that may cause the
entity to cease to continue as a going
concern.
C. The auditors responsibility is to consider the
appropriateness of managements use of the
going concern assumption and consider
whether there are material uncertainties
about the entitys ability to continue as a
going concern that need to be disclosed in
the financial statements.
D. The auditors responsibility is to give a
guarantee in the audit report that the entity
has the ability to continue as a going concern.

A.
199.

Which of the following conditions or events most

likely would cause an auditor to have substantial
doubt about an entitys ability to continue as a
going concern?
A. Cash flows from operating activities are
negative.
B. Stock dividends replace annual cash
dividends.
C. Significant related party transactions are
pervasive.
D. Research and development projects are
postponed.

B.
C.
D.

Consider the adequacy of disclosure about

the clients possible inability to continue as a
going concern.
Issue a qualified or adverse opinion,
depending upon materiality, due to the
possible effects on the financial statements.
Report to the clients audit committee that
managements accounting estimates may
need to be adjusted.
Reissue the prior years auditors report and
add an emphasis of matter paragraph that
specifically refers to substantial doubt and
going concern.

200.

Which of the following conditions or events most

likely would cause an auditor to have substantial
doubt about an entitys ability to continue as a
going concern?
A. Restrictions on the disposal of principal assets
are present.
B. Usual trade credit from suppliers is denied.
C. Significant related party transactions are
pervasive.
D. Arrearages in principal stock dividends are
paid.

204.

The auditor is required to obtain audit evidence

that management
I.
Acknowledges its responsibility for the fair
presentation of the financial statements in
accordance with applicable financial reporting
framework.
II. Has approved the financial statements.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

201.

Which of the following audit procedures would

most likely assist an auditor in identifying
conditions and events that may indicate there
could be substantial doubt about an entitys
ability to continue as a going concern?
A. Confirmation of bank balances.
B. Confirmation of accounts receivable from
major customers.
C. Reconciliation of interest expense with debt
outstanding.
D. Review of compliance with terms of debt
agreements.

205.

When an audit is made in accordance with

generally accepted auditing standards, the auditor
should always
A. Observe the taking of physical inventory on
the balance sheet date.
B. Obtain certain written representations from
management.
C. Employ analytical procedures as substantive
tests to obtain evidence about specific
assertions related to account balances.
D. Document the understanding of the clients
internal control and the basis for all
conclusions about the assessed level of
control risk for financial statement assertions.

206.

When considering the use of managements

written representations as audit evidence about
the completeness assertion, an auditor should
understand that such representations
A. Constitute sufficient appropriate audit
evidence to support the assertion when
considered in combination with a sufficiently
low assessed level of control risk.
B. Are not part of the audit evidence considered
to support the assertion.
C. Replace a low assessed level of control risk as
audit evidence to support the assertion.
D. Complement, but do not replace, substantive
tests designed to support the assertion.

207.

A written representation from a clients

management that, among other matters,
acknowledges responsibility for the fair
presentation of financial statements, should
normally be signed by the
A. Chief financial officer and the chair of the
board of directors.
B. Chief executive officer and the chief financial
officer.
C. Chief executive officer, the chair of the board
of directors, and the clients lawyer.

202.

203.

Harold, CPA, believes there is substantial doubt

about the ability of Jersamtan Co. to continue as a
going concern for a reasonable period of time. In
evaluating Jersamtans plans for dealing with the
adverse effects of future conditions and events,
Harold most likely would consider, as a mitigating
factor, Jersamtans plans to
A. Postpone expenditures for research and
development projects.
B. Purchase production facilities currently being
leased from a related party.
C. Strengthen internal controls over cash
disbursements.
D. Discuss with lenders the terms of all debt and
loan agreements.
When an auditor concludes that there is
substantial doubt about a continuing audit clients
ability to continue as a going concern for a
reasonable period of time, the auditors
responsibility is to

Page 22 of 27

D.

Chair of the audit committee of the board of

directors.

208.

The date of the management representation letter

should coincide with the date of the
A. Statement of Financial Position
B. Latest related party transaction
C. Auditors report
D. Latest interim financial information

209.

Which of the following statements concerning

management representations is incorrect?
A. Representations by management can be a
substitute for other audit evidence that the
auditor could reasonably expect to be
available.
B. If the auditor is unable to obtain sufficient
appropriate audit evidence regarding a
matter, which has, or may have, a material
effect on the financial statements and such
audit evidence is expected to be available,
this will constitute a limitation in the scope of
the audit, even if a representation from
management has been received on the
matter.
C. If a representation by management is
contradicted by other audit evidence, the
auditor should investigate the circumstances
and, when necessary, reconsider the
reliability of other representations by
management.
D. The auditors working papers would ordinarily
include a summary of oral discussions with
management or written representations from
management.

210.

211.

212.

213.

A.
B.
C.
D.

214.

The refusal of a clients lawyer to provide a

representation on the legality of a particular act
committed by the client is ordinarily
A. Proper grounds to withdraw from the
engagement.
B. Insufficient reason to modify the auditors
report because of the lawyers obligation of
confidentiality.
C. Considered to be a scope limitation.
D. Sufficient reason to issue a subject to
opinion.

215.

Managements refusal to give the auditor

permission to communicate with the entitys legal
counsel is most likely to lead to
A. An adverse opinion.
B. A qualified opinion or an adverse opinion.
C. An unqualified opinion.
D. A qualified opinion or a disclaimer of opinion.

216.

In which of the following circumstances would an

auditor most likely meet with the clients legal
counsel to discuss the likely outcome of the
litigation and claims?
I.
The auditor determines that the matter is a
significant risk.
II. There is a disagreement between
management and the entitys legal counsel.
III. The subject matter of the litigation is
complex.

What type of opinion should be expressed if the

clients management refuses to provide a
representation that the auditor considers
necessary?
A. Qualified opinion or a disclaimer of opinion.
B. Qualified opinion or an adverse opinion.
C. Adverse opinion or a disclaimer of opinion.
D. Unqualified opinion.
The primary source of information to be reported
about litigation, claims, and assessments is the
A. Independent auditor
B. Clients management
C. Court records
D. Clients lawyer
The primary reason an auditor requests that
letters of inquiry be sent to a clients attorneys is
to provide the auditor with
A. A description and evaluation of litigation,
claims, and assessments that existed at the
balance sheet date.
B. The attorneys opinions of the clients
historical experiences in recent similar
litigation.
C. Corroboration of the information furnished by
management about litigation, claims, and
assessments.
D. The probable outcome of asserted claims and
pending or threatened litigation.
The letter of audit inquiry should be

Prepared and sent by the auditor.

Prepared by management and sent by the
auditor.
Prepared and sent by management.
Prepared by the auditor and sent by
management.

A.
B.
C.
D.

I and II only.
II and III only.
I and III only.
I, II, and III.

217.

Which of the following statements extracted from

a clients lawyers letter concerning litigation,
claims, and assessments most likely would cause
the auditor to request clarification?
A. I believe that the action can be settled for
less than the damages claimed.
B. I believe that the company will be able to
defend this action successfully.
C. I believe that the plaintiffs case against the
company is without merit.
D. I believe that the possible liability to the
company is nominal in amount.

218.

The auditor should consider the status of legal

matters up to the
A. Balance sheet date.
B. Date of the auditors report.
C. Date of approval of the financial statements.
D. Date of issuance of the financial statements.

THE AUDITORS REPORT ON FINANCIAL

STATEMENTS

Page 23 of 27

B.
219.

220.

221.

The following statements relate to the date of the

auditors report. Which is false?
A. The auditor should date the report as of the
completion date of the audit.
B. The date of the auditors report should not be
earlier than the date on which the financial
statements are signed or approved by
management.
C. The date of the auditors report should not be
later than the date on which the financial
statements are signed or approved by
management.
D. The date of the auditors report should always
be later than the date of the financial
statements (i.e., the balance sheet date).

In which of the following circumstances would an

auditor most likely add an emphasis of matter
paragraph to the auditors report while expressing
an unqualified opinion?
A. There is a substantial doubt about the entitys
ability to continue as a going concern.
B. Managements estimates of the effects of
future events are unreasonable.
C. No depreciation has been provided in the
financial statements.
D. Certain transactions cannot be tested
because of managements records retention
policy.

C.
D.

224.

Adverse opinion.
Disclaimer of opinion

Which of the following terms is used in the

standard to describe the effects on the financial
statements of misstatements or the possible
effects on the financial statements, if any, that are
undetected due to an inability to obtain sufficient
appropriate audit evidence?
A. Persuasive
C.

B.

Material
Pervasive

D.

Extensive
225.

When audited financial statements are presented

in a document (e.g., annual report) containing
other information, the auditor
A. Should read the other information to consider
whether it is inconsistent with the audited
financial statements.
B. Has no responsibility for the other information
because it is not part of the basic financial
statements.
C. Has an obligation to perform auditing
procedures to corroborate the other
information.
D. Is required to express a qualified opinion if
the other information has a material
misstatement of fact.

226.

An auditor concludes that there is a material

inconsistency in the other information in an
annual report to shareholders containing audited
financial statements. If the auditor concludes that
the financial statements do not require revision,
but the client refuses to revise or eliminate the
material inconsistency, the auditor may
A. Disclaim an opinion on the financial
statements after explaining the material
inconsistency in an emphasis of matter
paragraph.
B. Revise the auditors report to include an other
matter paragraph describing the material
inconsistency.
C. Express a qualified opinion after discussing
the matter with the clients directors.
D. Consider the matter closed because the other
information is not in the audited statements.

227.

An auditor may express a qualified opinion under

which of the following circumstances?

An independent auditor discovers that a payroll

supervisor of the company being audited has
misappropriated P50,000. The companys total
assets and income before tax are P70 million and
P15 million, respectively. Assuming no other
issues affect the report, the auditors report will
most likely contain a/an
A. Unmodified opinion
C.

B.

A disclaimer of opinion is expressed because

of a scope limitation imposed on the auditor
by the appraiser.
A qualified opinion is expressed because of a
matter unrelated to the work of the appraiser.
An unqualified opinion is expressed and an
emphasis of matter paragraph is added to
disclose the use of the appraisers work.

D.

Scope qualification
222.

223.

A note to the financial statements of the Prudent

Bank indicates that all of the records relating to
the banks business operations are stored on
magnetic disks, and that no emergency backup
systems or duplicate disks are stored because the
bank and its auditors consider the occurrence of a
catastrophe to be remote. Based upon this note,
the auditors report should express
A. A qualified opinion
C.
An
adverse opinion
B. An unmodified opinion
D.
A
subject to opinion
When would the auditor refer to the work of an
appraiser in the auditors report?
A. An adverse opinion is expressed based on a
difference of opinion between the client and
the outside appraiser as to the value of
certain assets.

Page 24 of 27

A.
B.
C.
D.
228.

229.

230.

Lack of Sufficient
Restriction on the
Appropriate Evidence Scope of the Audit
No
No
No
Yes
Yes
No
Yes
Yes

In which of the following situations would an

auditor ordinarily choose between expressing a
qualified opinion or an adverse opinion?
A. The auditor wishes to emphasize an unusually
important subsequent event.
B. The financial statements fail to disclose
information that is required by Philippine
Financial Reporting Standards.
C. Events disclosed in the financial statements
cause the auditor to have substantial doubt
about the entitys ability to continue as a
going concern.
D. The auditor did not observe the entitys
physical inventory and is unable to become
satisfied as to its balance by other auditing
procedures.

B.

C.

D.

232.

An auditor should disclose the substantive reasons

for expressing an adverse opinion in the Basis for
Adverse Opinion paragraph
A. Following the opinion paragraph.
B. Preceding the opinion paragraph.
C. Following the introductory paragraph.
D. Within the notes to the financial statements.
There are two broad financial reporting
frameworks for comparatives: the corresponding
figures and the comparative financial statements.
Which of the following statements is correct
concerning these reporting frameworks?
A. Under the corresponding figures framework,
the corresponding figures for the prior
period(s) are integral part of the current
period financial statements.
B. Under the corresponding figures framework,
the corresponding figures for the prior
period(s) are considered separate financial
statements.
C. Under the comparative financial statements
framework, the comparative financial
statements for the prior period(s) are
intended to be read in conjunction with the
amounts and other disclosures relating to the
current period.
D. Under the comparative financial statements
framework, the amounts and other
disclosures for the prior period(s) form part of
the current period financial statements.

According to PSA 710, the incoming auditor may

refer to the predecessor auditors report on the
corresponding figures in the incoming auditors
report for the current period. The incoming
auditors report should indicate
I. That the financial statements of the prior
period were audited by another auditor.
II. The type of report issued by the predecessor
auditor.
III. The date of the predecessor auditors report.
A.

I and II only.

B.

and III only.

II and III only.
and III.

233.

C.
I
D.
I, II,

When the prior period financial statements are not

audited, the incoming auditor should state in the
auditors report that
I. The corresponding figures are unaudited.
II. The incoming auditor is not required to
perform procedures regarding opening
balances of the current period.
A.

I only

C.

B.

Both I and II
II only

D.

Neither I nor II
234.

231.In which of the following circumstances would an

auditors report least likely include specific
reference to the corresponding figures?
A.

When the auditors report on the prior period,

as previously issued, included a modified
opinion and the matter which gave rise to the
modification is unresolved, and results in a
modification of the auditors report regarding
the current period figures.
When the auditors report on the prior period,
as previously issued, included a modified
opinion and the matter which gave rise to the
modification is unresolved, but does not result
in a modification of the auditors report
regarding the current period figures.
When the auditors report on the prior period
financial statements containing a material
misstatement included an unmodified opinion
and the prior period financial statements
have not been revised and reissued, and the
corresponding figures have not been properly
restated and/or appropriate disclosures have
not been made.

When the auditors report on the prior period,

as previously issued, included a modified
opinion and the matter which gave rise to the
modification is resolved and properly dealt
with in the financial statements.

Page 25 of 27

J, CPA, audited JST Companys prior-year financial

statements. These statements are presented with
those of the current year for comparative
purposes without Js auditors report, which
expressed a qualified opinion. In drafting the
current years auditors report, S, CPA, the
incoming auditor, should
I. Not name J as the predecessor auditor.
II. Indicate the type of report issued by J.
III. Indicate the substantive reasons for Js
qualification.
IV. Indicate the date of Js auditors report.

A.

I, II, and IV only.

B.

and III only.

II, III, and IV only.

C.
I, II,

B.
C.

D.
I, II,

III, and IV.

D.

235.

The predecessor auditor, who is satisfied after

properly communicating with the incoming
auditor, has reissued his/her auditors report on
prior year financial statements. The predecessor
auditors report should
A. Refer to the work of the incoming auditor in
the scope and opinion paragraphs.
B. Refer to the report of the incoming auditor
only in the scope paragraph.
C. Refer to both the work and the report of the
incoming auditor only in the opinion
paragraph.
D. Not refer to the report or the work of the
incoming auditor.

236.

The following statements relate to unaudited prior

year financial statements that are presented in
comparative form with audited current year
financial statements. Which is incorrect?
A. The incoming auditor should state in the
auditors report that the comparative financial
statements are unaudited.
B. The incoming auditor need not perform audit
procedures regarding opening balances of the
current period.
C. Clear disclosure in the financial statements
that the comparative financial statements are
unaudited is encouraged.
D. In situations where the incoming auditor
identifies that the prior year unaudited figures
are materially misstated, the auditor should
request management to revise the prior
years figures or if management refuses to do
so, appropriately modify the report.

OTHER REPORTING RESPONSIBILITIES

237.

238.

Financial statements of an entity that have been

reviewed by an accountant should be
accompanied by a report stating that a review
A. Provides only limited assurance that the
financial statements are fairly presented.
B. Includes examining, on a test basis,
information that is the representation of
management.
C. Consists principally of inquiries of company
personnel and analytical procedures applied
to financial data.
D. Does not contemplate obtaining corroborating
evidential matter or applying certain other
procedures ordinarily performed during an
audit.

239.

240.

Conducted the review in accordance with the

Philippine Standard on Review Engagements.
Obtained reasonable assurance about
whether the financial statements are free of
material misstatements.
Examined evidence, on a test basis,
supporting the amounts and disclosures in
the financial statements.

Financial statements of an entity that have been

reviewed by an accountant should be
accompanied by a report stating that
A. The scope of the inquiry and analytical
procedures performed by the accountant has
not been restricted.
B. The financial statements are the responsibility
of the companys management.
C. A review includes examining, on a test basis,
evidence supporting the amounts and
disclosures in the financial statements.
D. A review is greater in scope than a
compilation, the objective of which is to
present financial statements that are free of
material misstatements.
An accountant who reviews the financial
statements of an entity should issue a report
stating that a review
A. Provides less assurance than an audit.
B. Provides negative assurance that internal
control is functioning as designed.
C. Provides only limited assurance that the
financial statements are fairly presented.
D. Is substantially more in scope than a
compilation.

241.

When compiling the financial statements of an

entity, an accountant should
A. Review agreements with financial institutions
for restrictions on cash balances.
B. Understand the accounting principles and
practices of the entitys industry.
C. Inquire of key personnel concerning related
parties and subsequent events.
D. Perform ratio analyses of the financial data of
comparable prior periods.

242.

When compiling an entitys financial statements,

an accountant would be least likely to
A. Perform analytical procedures designed to
identify relationships that appear to be
unusual.
B. Read the compiled financial statements and
consider whether they appear to include
adequate disclosure.
C. Obtain an acknowledgment from
management of its responsibility for the
financial statements.
D. Plan the work so that an effective
engagement will be performed.

243.

Which of the following should not be included in

an accountants report based upon the
compilation of an entitys financial statements?
A. A statement that a compilation of the
companys financial statements was made in
accordance with the Philippine Standard on
Related Services applicable to compilation
engagements.

An accountants report on a review of the financial

statements of an entity should state that the
accountant
A. Does not express an opinion or any form of
limited assurance on the financial statements.

Page 26 of 27

B.
C.
D.

A statement that management is responsible

for the financial statements.
A statement that the accountant has not
audited or reviewed the statements.
A statement that the accountant does not
express an opinion but provides only negative
assurance on the statements.

244.

Negative assurance may be expressed when an

accountant is requested to report agreed-upon
procedures to specified
Elements of a Accounts of a
Financial Statement Financial
Statement
A.
Yes
Yes
B.
Yes
No
C.
No
No
D.
No
Yes
245.

246.

An accountant may accept an engagement to

apply agreed-upon procedures that are not
sufficient to express an opinion on one or more
specified accounts or items of a financial
statement provided that
A. The accountants report does not enumerate
the procedures performed.
B. The financial statements are prepared in
accordance with a comprehensive basis of
accounting other than generally accepted
accounting principles.
C. Distribution of the accountants report is
restricted.
D. The accountant is also the entitys continuing
auditor.

B.
C.
D.

Present estimates given one or more

hypothetical assumptions.
Unlike a projection, may contain a range.
Is based on assumptions reflecting conditions
expected to exist and courses of action
expected to be taken.

248.

When an accountant examines prospective

financial statements, the accountants report
should include a separate paragraph that
A. Contains an opinion as to whether the
prospective financial statements are properly
prepared on the basis of the assumptions and
are presented in accordance with generally
accepted accounting principles in the
Philippines.
B. Provides an explanation of the differences
between an examination and an audit.
C. States that the accountant is responsible for
events and circumstances up to 1 year after
the reports date.
D. Disclaims an opinion on whether the
assumptions provide a reasonable basis for
the prospective financial statements.

249.

The following statements relate to the

examination of prospective financial information.
Which is false?
A. The auditor should express an opinion as to
whether the results shown in the prospective
financial information will be achieved.
B. Before accepting an engagement to examine
prospective financial information, the auditor
should consider the intended use of the
information.
C. The auditor should not accept, or should
withdraw from, an engagement to examine
prospective financial information when the
assumptions are clearly unrealistic.
D. When in the auditors judgment an
appropriate level of satisfaction has been
obtained, the auditor is not precluded from
expressing positive assurance regarding the
assumptions.

250.

Which of the following is a prospective financial

information for general use upon which an
accountant may appropriately report?
A. Financial projection
B. Partial presentation
C. Pro forma financial statement
D. Financial forecast

Given one or more hypothetical assumptions, a

responsible party may prepare, to the best of its
knowledge and belief, an entitys expected
financial position, results of operations, and cash
flows. Such prospective financial statements are
known as
A. Pro forma financial statements
B. Financial projections
C. Partial presentations
D. Financial forecasts

247.A financial forecast consists of prospective financial

statements that present an entitys expected
financial position, results of operations, and cash
flows. A forecast
A. Is based on the most conservative estimates.

Page 27 of 27

--- END ---