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University of San Jose-Recoletos

AUDITING THEORY

1. Which of the following is not a basic element of an audit report?


a. Title of the report. c. Client’s address.
b. Introductory paragraph. d. Auditor’s address.

2. A measure of uniformity in the form and content of the auditor’s report is desirable because
a. it helps the auditors avoid legal liability.
b. it helps the readers understand the report.
c. it helps the auditor identify the usual circumstances that are expected to occur.
d. it makes the auditors more informed of their responsibilities with respect to audit report.

3. Which of the following is not explicitly included in the opening paragraph of an audit report?
a. Identification of the financial statements that have been audited.
b. Statement that the financial statements are the responsibility of the entity’s management.
c. Statement that the responsibility of the auditor is to express an opinion on the financial statements based on his audit.
d. A statement by the auditor that the audit provides a reasonable basis for the opinion.

4. Where do you find the following sentence?


“Those standards require that we plan and perform the audit to obtain a reasonable assurance about whether the financial
statements are free of material misstatements.”
a. Introductory paragraph of the auditor’s report.
b. Scope paragraph of the auditor’s report.
c. Management’s representation letter.
d. Audit program.

5. Whenever an auditor issues an adverse opinion, the implication is that the auditor
a. does not know if the statements are presented fairly.
b. does not believe the statements are presented fairly.
c. is satisfied that the statements are presented fairly except for a specific aspect of them.
d. is satisfied that the statements are presented fairly.
6. When there are multiple uncertainties that are significant to the financial statements, the auditor may consider it appropriate to
a. withdraw from the engagement. c. disclaim an opinion.
b. issue an adverse opinion. d. issue a qualified opinion.

7. When an auditor expresses an opinion other than unqualified opinion, a clear description of all substantive reasons for the
modification of the opinion should be included in the report. This explanation should be presented
a. as a separate paragraph that precedes the opinion paragraph of the audit report.
b. as a separate paragraph, preferably after the opinion paragraph of the audit report.
c. in the opinion paragraph.
d. as a separate paragraph in the notes to financial statements.

8. Which of the following does not warrant a modification of an unqualified opinion?


a. A significant doubt about the ability of the company to continue as a going concern; such concern is adequately disclosed by
the entity in the notes to financial statements.
b. A limitation of the scope of the audit, the possible effect of which is material to the financial statements.
c. The auditor has disagreement with management regarding the acceptability of the accounting policies, the effect of which is
material.
d. The omission of significant information in the financial statement.

9. An auditor’s report on financial statements prepared in accordance with another comprehensive basis of accounting should include
all of the following except
a. an opinion as to whether the basis of accounting used is appropriate under the circumstances.
b. an opinion as to whether the financial statements are presented fairly in conformity with the comprehensive basis of
accounting.
c. reference to the note to the financial statements that describes the basis of presentation.
d. a statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting
principles.

10. When additional language is added to the auditor’s report without modifying the opinion, the additional language should be
included in
a. the introductory paragraph. c. the opinion paragraph.
b. the scope paragraph. d. one or more additional paragraphs that follow the
opinion paragraph.
11. When the principal auditor decides to refer to another auditor in his/her report, the report should always include
a. a qualified or adverse opinion.
b. a disclaimer of opinion regarding the financial statements audited by the other auditor.
c. the percentage and monetary amounts of the portion of the financial statements examined by the other auditor.
d. reference to a footnote where the division of responsibility between the principal auditor and the other auditor is described in
detail.

12. Hernandez, CPA, concludes that there is substantial doubt about JKL Co.’s ability to continue as a going concern. If JKL’s financial
statements adequately disclose its financial difficulties, Hernandez’s auditor’s report should
Include an explanatory Specifically use Specifically use
paragraph following the words the words
the opinion paragraph Going concern substantial doubt
a. Yes Yes Yes
b. Yes Yes No
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c. Yes No Yes
d. No Yes Yes

13. Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going concern for a reasonable period
of time. In evaluating Hill’s plans for dealing with the adverse effects of future conditions and events, Davis most likely would
consider, as a mitigating factor, Hill’s plan to
a. accelerate research and development projects related to future products.
b. accumulate treasury stock at prices favorable to Hill’s historic price range.
c. purchase equipment and production facilities currently being leased.
d. negotiate reductions is required dividends being paid on preferred stock.

14. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually result when management
a. is unable to obtain audited financial statements supporting the entity’s investment in a foreign subsidiary.
b. refuses to disclose in the notes to the financial statements related-party transactions authorized by the board of directors.
c. does not sign an engagement letter specifying the responsibilities of both the entity and the auditor.
d. fails to correct a reportable condition committed after the prior year’s audit.

15. The existence of audit risk is recognized by the statement in the auditor’s standard report that the auditor
a. obtains reasonable assurance about whether the financial statements are free of material misstatement.
b. assesses the accounting principle used and also evaluates the overall financial statement presentation.
c. realizes some matters, either individually or in the aggregate, are important while other matters are not important.
d. is responsible for expressing an opinion on the financial statements that are the responsibility of management.
16. An auditor was unable to obtain sufficient competent evidential matter concerning certain transactions due to an inadequacy in the
entity’s accounting records. The auditor would choose between issuing a(n)
a. qualified opinion and unqualified opinion with an explanatory paragraph.
b. unqualified opinion with explanatory paragraph and an adverse opinion.
c. adverse opinion and a disclaimer of opinion.
d. disclaimer of opinion and a qualified opinion.

17. If the auditor believes that the entity will not be able to continue as a going concern and the financial statements are prepared on a
going concern basis, the auditor’s report should include
a. unqualified opinion with explanatory paragraph. c. adverse opinion.
b. qualified opinion. d. disclaimer of opinion.

18. When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave ri se to
the modification is unresolved, and results in a modification of the auditor’s report regarding the current period figures
a. the auditor’s report should be unmodified regarding the corresponding figures.
b. the auditor’s report should also be modified regarding the corresponding figures.
c. the auditor’s report does not refer to the previous modification.
d. the auditor should omit the comparatives as corresponding figures.

19. In relation to comparatives as corresponding figures, which of the following is incorrect?


a. When the prior period financial statements are not audited, the incoming auditor should state in the auditor’s report that the
corresponding figures are unaudited.
b. The incoming auditor must refer to the predecessor auditor’s report on the corresponding figures in the incoming auditor’s
report for the current period.
c. When the financial statements of the prior period were audited by another auditor, the incoming auditor’s report should state
that the prior period was audited by another auditor.
d. In situations where the incoming auditor identified that the corresponding figures are materially misstated, the auditor should
request management to revise the corresponding figures or if management refuses to do so, appropriately modify the report.

20. If after performing procedures, the auditor is unable to obtain sufficient, appropriate evidence concerning opening balances, the
auditor may express modified opinion on financial statements during and as of year end of the current period
a. either qualified or disclaimer for balance sheet and income statement.
b. qualified or disclaimer of opinion for balance sheet only.
c. qualified or disclaimer of opinion for income statement only.
d. no modification.
21. How should generally accepted auditing standards and the Philippine Standards on Auditing be looked on by CPA practitioners?
a. They are maximum standards that must be complied with.
b. They are minimum standards of performance.
c. They are clearly defined guidelines for determining the extent of evidence to be accumulated.
d. They are minimum specific audit procedures that the auditors are expected to perform.

22. What is the overriding objective of the International Auditing Standards that are issued by the International Auditing Practi ces
Committee of the International Federation of Accountants?
a. To improve the uniformity of auditing practices and related services throughout the world.
b. To override a count’s regulations governing the audit of financial statements.
c. To replace the generally accepted auditing standards.
d. To provide uniformity of specific audit procedures that are acceptable worldwide.

23. Which of the following least likely requires an additional explanatory paragraph in a standard unqualified report?
a. Substantial doubt about going-concern ability of the entity.
b. Reports involving other auditors.
c. Emphasis of a matter.
d. Auditor agrees with change in generally accepted accounting principles.

24. Which of the following requires a modified wording report?


a. Substantial doubt about going-concern problems of the entity.
b. Reports involving other auditors.
c. Emphasis of a matter.
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d. All of the above.

25. Which of the following changes would affect comparability but not consistency?
a. Variations in format and presentation of financial information.
b. Change from FIFO to LIFO inventory costing.
c. Changes in reporting entity, such as the inclusion of a company in consolidated financial statements.
d. Correction of errors involving accounting principles.
26. When a significant portion of the financial statements have been audited by other auditors and the principal auditor is not willing to
assume the whole responsibility, the auditor report should include
a. modified wording in the introductory paragraph.
b. a modified wording in the introductory and opinion paragraphs but not on opinion paragraph.
c. modified wordings on the three paragraphs.
d. separate paragraph to indicate a divided responsibilities.

27. Which of the following types of report is mostly uncommon?


a. Adverse report. c. Standard unqualified report with modified wordings.
b. Qualified report. d. Unqualified report.

28. Which of the following scope limitation that is beyond the auditor and the client’s control may mostly occur on a late engagement?
a. Review of bank reconciliation prepared by client personnel.
b. Request for cutoff bank statement.
c. Tests of sales transactions.
d. Observation of year-end inventory.

29. In which of the following type of audit report would omission of scope paragraph is required?
a. An except for opinion due to possible significant effect of a client-imposed limtation.
b. A disclaimer of opinion due to possible significant effect of client-imposed scope limitation.
c. An audit report limited to income statement only.
d. A and B.

30. If the principal auditor’s report refers to the audit of another auditor, he is required to disclose the
a. name of another auditor.
b. portion of the financial statements audited by the other auditor.
c. opinion expressed by the other auditor and the reason if the opinion is other than unqualified.
d. reason for being unwilling to assume the responsibility for the other auditor’s work.
31. Under which of the following circumstances would an unqualified opinion be entirely appropriate?
a. The principal auditor decides to make reference to the qualified report of another auditor, who audited a subsidiary
b. There are significant uncertainties affecting the financial statements.
c. There has been material effect between periods of the change in the methods of application of GAAP.
d. There has been a material effect of a departure from generally accepted accounting principle.

32. Celia, CPA, is auditing Lyka Corporation for the first time. Lyka has been in the business for several years but has never had an
audit before. After the audit is completed, Celia concludes that the current year balance sheet is stated correctly in accordance with
GAAP. The client did not authorize Celia to do test work for any of the previous years. Reporting on the current year’s financial
statements, Celia most likely would express
a. Qualified opinion on the financial statements of Lyka Corporation.
b. Unqualified opinion on the balance sheet and qualified opinion on the income statement.
c. Unqualified opinion on the income statement and qualified opinion on the balance sheet.
d. Unqualified opinion on Lyka Corporation’s financial statements.

33. Millard, CPA, is engaged in the audit of the financial statements of Alpha Company, a manufacturing entity with branch offices in
many widely separated cities. Millard was not able to count the substantial undeposited cash receipts on the last day of the fiscal
year at all branch offices. As an alternative procedures, Millard verified all the reported undeposited cash collections in the cut-off
bank statements and was satisfied as to cut-off of cash receipts.
How should Millard prepare his audit report?
a. Issue an unqualified opinion with an emphasis of matter paragraph that refers to the use of alternative audit procedure.
b. Issue a qualified opinion due to scope limitation.
c. Issue an unqualified opinion on income statement and a qualified opinion on the balance sheet.
d. Issue a standard unqualified opinion.

34. Trulav Company has prepared financial statements but has decided to omit the statement of cash flows. The management believes
that the users of the financial statements the statement of cash flows confusing and prefer not have it included.
The omission of the statement of cash flows would require the auditor to
a. Include an unqualified report on emphasis of matter paragraph that explains the reasons for such an omission of the statement.
b. Issue an adverse opinion due to inadequate disclosure.
c. Issue a qualified opinion due to inadequate disclosure.
d. Issue an unqualified opinion based on limited reported objective.

35. Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about the ability of the entity to
continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters
are adequate.
The auditor should issue his report that contains
a. Disclaimer of opinion. c. Standard unqualified opinion.
b. Adverse opinion. d. Unqualified opinion with an emphasis of matter paragraph.
36. A continuing auditor has just completed the audit of the entity. The audit report for the past three years included an emphasis of
matter paragraph that referred to a substantial doubt about the ability of the entity to continue as a going concern. At the middle
of the current audit year, the major stockholders infused substantial capital that made the company stable. The continuing au ditor
should report on the comparative financial statements by
a. Updating the audit report by issuing a standard three-paragraph audit report.
b. Including an emphasis of matter paragraph that refers to prior years’ going concern problem.
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c. Issue an unqualified opinion with an emphasis of matter paragraph that describes the steps the management did in solving its
going concern problem.
d. Qualify the audit report due to questionable strategy of strengthening the entity’s financial stability.

37. An auditor assesses control risk to do which of the following?


a. Determine the tests of controls to perform
b. Determine the nature, timing, and extent of substantive tests to perform
c. Ascertain whether reportable conditions exists
d. Ascertain whether there is an appropriate segregation of duties among employees

38. Which of the following auditing procedures should not be considered a test of control?
a. Observing preparation of the bank reconciliation
b. Inquiring about the entity’s organization structure
c. Inspecting customer order forms for the signature of the credit manager
d. Confirming with the customer the amount owed to the client

39. One of the company’s internal control structure procedures requires that shipping documents be matched with customer invoices. To
which of the following is that procedure relevant?
a. The completeness assertion for revenue
b. The existence assertion for inventory
c. The occurrence assertion for purchases
d. The presentation and disclosure assertion for accounts receivable

40. Tests of controls are primarily concerned with all but which of the following questions?
a. How were policies or procedures performed?
b. Were the policies or procedures performed?
c. How were the policies or procedures designed?
d. Do policies or procedures exist?
41. Which of the following is not a reason an auditor should obtain an understanding of the elements of an entity’s internal control
structure when planning an audit?
a. To identify types of potential misstatements that can occur,
b. To design substantive tests
c. To consider the operating effectiveness of the internal control structure
d. To consider factors that affect the risk of material misstatements

42. The sequence of the steps in the auditor’s consideration of the internal control structure is as follows:
a. Obtain an understanding, design substantive tests, perform tests of controls, determine assessed level of control risk.
b. Design substantive tests, obtain an understanding, perform tests of control, determine assessed level of control risk.
c. Obtain an understanding, performs tests of controls, determine assessed level of control risk, design substantive tests.
d. Perform tests of controls, obtain an understanding, determine assessed level of internal control, design substantive tests

43. When documenting the assessed level of control risk, the auditor should
a. Express the assessed level of control risk in either quantitative of qualitative terms for all assertions.
b. State the basis for the conclusion when the assessed level of control risk is below the maximum level for an assertion
c. State the basis for the conclusion when the assessed level of control risk is at the maximum level for an assertion
d. Describe how the planned substantive test have been affected by the assessed level of control risk

44. In determining the assessed level f control risk, which of the following statements is correct?
a. The knowledge obtained from the understanding of the internal control structure cannot be used
b. The knowledge obtained about the internal control structure from the prior audits can be used
c. The auditor evaluates the design of a policy and whether it has been placed in operation
d. Observation provides more persuasive evidence about the operating effectiveness of a policy or procedure than expecting
documentation

45. After considering a client’s internal control system, an auditor has concluded that it is well designed and is functioning as intended.
Under these circumstances the auditor would most likely
a. Determine the control policies and procedures that should prevent or detect errors and irregularities
b. Determine whether transactions are recorded to permit preparation of financial statements in conformity with GAAP
c. Not increase the extent of predetermined substantive tests
d. Perform tests of controls to the extent outlined in the audit program
46. Ideally, tests of controls should be applied to transactions and controls
a. at each quarterly interim period c. at the beginning of the fiscal year
b. at the balance sheet date d. for the entire period under audit

47. A procedure that would most likely be used by an auditor in performing tests of control procedures that involve segregation o f
functions and that leave no transaction trail is
a. Inspection c. Reconciliation
b. Observation d. Reperformance

48. Each key control that the auditor intends to rely on must be supported by sufficient
a. analytical review procedures c. tests of transactions
b. tests of controls d. reperformance procedures

49. When controls leave no documentary evidence or trail


a. it is impossible for the auditor to verify them so he/she will have to rely on substantive tests
b. it is important to audit that area of client’s system
c. the auditor generally observes them being applied
d. the only thing available as verification of their effectiveness is inquiry of management

50. When the compensating control exists, a weakness in the system


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a. could cause a material loss, so it must be tested using substantive procedures
b. is magnified and must be removed from the sampling process and examined in its entirety
c. is no longer a concern because the potential for misstatements has been sufficiently reduced
d. is reduced but not removed; therefore, it is still of concern to the auditor
51. One of the ways to eliminate nonsampling risk is through
a. control which ensure that the sample drawn is random and representative
b. proper supervision and instruction of the audit team
c. proper supervision and instruction of the client’s employees
d. the use of attributes sampling rather than variables sampling

52. Sampling risk is an inherent part of sampling that results from


a. failure to recognize exceptions c. testing less than the entire population
b. inappropriate audit procedures d. weaknesses in client’s internal control system

53. If the auditor decides to assess control risk at the maximum level, tests of control are
a. Increased in number c. Reduced in number
b. Not performed d. Unchanged from prior planned settings

54. An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is
performed to satisfy the audit objective of
a. Accuracy b. Existence c. Completeness d. Control

55. An auditor examining inventory may appropriately apply sampling for attributes in order to estimate the
a. Average price of inventory items c. Percentage of slow-moving inventory items
b. Physical quantity of inventory items d. Peso value of inventory

56. A principal advantage of statistical methods of attributes sampling over nonstatistical method is that they provide a scientific basis
for planning the
a. Expected population exception rate c. Sample price
b. Risk of assessing control risk too low d. Tolerable exception rate
57. A basic premise underlying analytical procedure is that:
a. These procedures cannot replace tests of balances and transactions
b. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements
c. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations
d. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to
the contrary

58. One reason why an auditor makes an analytical review of the client’s operations is to identify
a. improper separation of accounting and other financial duties
b. weakness of a material nature in the system of internal accounting control
c. unusual transactions
d. non-compliance with prescribed control procedures

59. At what stage in the audit are the analytical procedures performed?
a. In planing stage
b. In conjunction with tests of transactions and tests of details of balances
c. Near the end
d. During all three states

60. “Unusual fluctuations” occur when


a. significant differences are not expected but do exist
b. significant differences are expected but do not exist
c. there is a material accounting error or irregularity
d. any one of the above three situations may occur
61. To help plan the nature, timing and extent of substantive auditing procedures, preliminary analytical procedures should focus on:
a. Enhancing the auditors understanding of the client’s business and events that have occurred since the last audit date
b. Developing plausible relationships that corroborate anticipated results with a measurable amount of precision
c. Applying ration analysis to externally generated data such as published industry statistics or price indices
d. Comparing recorded financial information to the results of other tests of transactions and balances

62. Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?
a. Relationships involving balance sheet accounts
b. Transactions subject to management discretion
c. Relationships involving income statement accounts
d. Data subject to audit testing in the prior year

63. An auditor compares the 20x3 revenues and expenses with those of the prior year and investigates all changes exceeding 10%.
By this procedure the auditor would be most likely to learn that:
a. Fourth payroll taxes were not paid
b. The client changed its capitalization policy for small tools in 20x3
c. An increase in property tax rates has not been recognized in the client’s accrual
d. The 20x3 provision for uncollectible accounts were inadequate because of worsening economic conditions

64. For which of the following account balances are substantive tests of details least likely to be performed unless analytical review
procedures indicate the need to extend details testing?
a. Payroll expense c. Research and development
b. Marketable securities d. Legal expense

65. Which of the following comparisons would be most useful to an auditor in evaluating the results of an entity’s operations?
a. Prior year accounts payable to current year accounts payable
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b. Prior year payroll expense to budgeted current year payroll expense
c. Current year revenue to budgeted current year revenue
d. Current year warranty expense to current year contingent liabilities
66. Where an unusual fluctuation is indicated by analytical procedures and management is unable to provide a satisfactory
explanation, the auditor must assume that there is a high probability that an error or irregularity exists. In this case, the auditor
must:
a. Issue either a qualified or an adverse opinion
b. Issue a disclaimer
c. Issue either a qualified opinion or a disclaimer
d. Design other appropriate audit procedures to determine if such errors do exist

67. The auditor notices significant fluctuations in key elements of the company’s financial statements. If management is unable to
provide an acceptable explanation, the auditor should
a. Consider the matter a scope limitation
b. Perform additional audit procedures to investigate the matter further
c. Intensify the examination with the expectation of detecting management fraud
d. Withdraw from the engagement

68. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to
sales may suggest which of the following possibilities?
a. unrecorded purchases
b. unrecorded sales
c. merchandise purchases being charged to selling and general expense
d. fictitious sales

69. Sampling results could lead to the auditor to believe erroneously that the account does not contain more monetary error that can be
tolerated. Which of the following corresponds to the preceding statement?
a. The risk of incorrect rejection c. Estimation sampling
b. The risk if incorrect acceptance d. Projected misstatement

70. The auditor generally gives most emphasis to ratio and trend analysis in the examination of the statement of?
a. Retained earnings c. Financial position
b. Income d. Cash flows
71. Analytical procedures used in the overall review stage of an audit generally include:
a. Considering unusual or unexpected account balances that were not previously identified.
b. Performing tests of transactions to corroborate management’s financial statement assertions
c. Gathering evidence concerning account balances that have not changed from the prior year
d. Re-testing control procedures that appeared to be ineffective during the assessment of control risk

72. An aging analysis of accounts receivable would provide an indication as to the:


a. Validity of the accounts c. Integrity of the credit grantors
b. Collectibility of the accounts d. Solvency of the customers

73. Evidential matter supporting the financial statements consists of underlying accounting data and all corroborating information
available to the auditor. An example of corroborating information is:
a. General and subsidiary ledgers
b. Worksheets supporting cost allocation
c. Minutes of meetings
d. Accounting manuals

74. Which of the following is an accepted audit procedure that involves the analysis if two records independent of one another?
a. Observation c. Reconciliation
b. Statistical sampling d. Vouching

75. The primary difference between an audit of the balance sheet and the audit of income statement is that the audit of the balan ce
sheet date more with the verification of
a. Transactions c. Costs
b. Authorizations d. Balances
76. An auditor encounters the following four accounts listed among the assets of a client. Most likely the auditor would take exception to
the asset recognition of:
a. Excess cost over the book value of a subsidiary
b. Research and development costs incurred by an oil exploration company
c. Goodwill arising from appraisal
d. Organization cost

77. One of this procedures is not deemed proper:


a. Cash count should be made at a time not known in advance to the custodians of cash.
b. Cash should be counted only in the presence of the custodian or responsible representative of the client. If any of them were
personally present, there is no need for them to check the cash count.
c. Cash fund at distant branch offices should be confirmed in writing with the custodian, where it is not practicable for the auditor
to visit the said office
d. The auditor should determine beforehand the appropriate amounts and locations of company funds not recorded on the books
which are in the possession of the custodian of company funds.

78. The examination of underlying documentary evidence in order to verify the entries which are based upon the evidence
a. Testing b. Auditing c. Tracing d. Vouching

79. Several types of documentary evidence were received by the auditor, but of these only one is considered most reliable:
a. Working papers prepared by the Chief Accountant and reviewed personally by the VP-Finance.
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b. A check issued by the Treasurer, with the payee’s endorsement, included in the statement mailed by the bank directly to the
auditor.
c. A delivery receipt issued by the shipping department, signed by the customer, with an accompanying copy of the sales invoice.
d. Confirmation of the balance of an accounts payable mailed by and returned directly to the auditor.

80. A written request and acknowledgment requiring a letter reply only in the event of a discrepancy.
a. negative confirmation c. letter confirmation
b. positive confirmation d. Client’s representation letter
81. By a cut-off review and close examination of sales journal entries for several days before and after a balance sheet date, and
auditor might detect
a. Kiting cash sales receipts c. Inflating sales for the year
b. Lapping sales receipts d. Misappropriation of sales stocks

82. A positive account receivable confirmation returned without exception attest to the
a. collectibility of the receivable balance
b. accuracy of the receivable balance
c. accuracy of the aging of the accounts receivable balance
d. accuracy of the allowance for bad debts

83. Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?
a. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable
b. Examine unusual relationships between monthly accounts payable balance and recorded purchases
c. Examine a sample of vendors’ invoices a few days prior to and subsequent to year end to ascertain whether they have been
properly recorded
d. Examine a sample of cash disbursements in the period subsequent to the year end

84. The physical count of the inventory of a retailer was higher than that shown by the perpetual records. Which of the following could
explain this differences?
a. Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the
inventory compilation sheets.
b. Credit memos for several items returned by the customers had not been prepared.
c. No journal entry had been made on the retailer’s books for several items returned to the suppliers.
d. An item purchased “FOB shipping point” had not arrived at the date of the inventory count and had not been reflected in the
perpetual records

85. Cut-off tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year
provide assurance about management’s assertion of
a. Completeness b. Existence c. Presentation d. Rights
86. In the context of an audit of financial statements, substantive tests are audit procedures that
a. may be either tests of transactions, direct tests of financial balances or analytical tests
b. may be estimated under certain conditions
c. are designed to discover significant subsequent events
d. will increase proportionately with increase in assessed control risk

87. If the objective of a test of details is to detect overstatement of sales, the auditor should vouch transactions from the
a. Accounting records to the source documents
b. Cash receipts journal to the sales journal
c. Sales journal to the cash receipts journal
d. Source documents to the accounting records

88. Which of the following combinations of procedures would an auditor most likely perform to obtain about plant asset additions?
a. Inspecting documents and physically examining plant assets
b. Recalculating and obtaining written management representations
c. Observing operating activities and comparing balances to prior period balances
d. Confirming ownerships and corroborating transactions through inquiries of client personnel

89. An auditor who selects a sample of items from the vouchers payable register for the last month of the period under audit and traces
these items to underlying documents is gathering primarily in support of the assertion that
a. Cash disbursements were recorded as incurred obligations
b. Incurred obligations were recorded in the correct period
c. Recorded obligations were valid
d. Recorded obligations were paid

90. Which of the following statements is correct concerning the use of negative confirmation requests?
a. Negative confirmation requests are effective when detection risk is low
b. Negative confirmation requests are effective when understatements of account balances are suspected
c. Unreturned negative confirmation requests indicate that alternative procedures are necessary
d. Unreturned negative confirmation requests rarely provide significant explicit evidence
91. In the audit of inventories, an auditor would least likely verify that
a. All inventory owned by the client is on hand at the time of the count
b. Damaged goods and obsolete items of inventories have been properly accounted for
c. The client has used proper inventory pricing
d. The financial statement presentation of the inventories is appropriate

92. A client company has not paid its 2002 audit fees. According to the Code of Professional Conduct, for the auditor to be considered
independent with respect to the 2003 audit, the 2002 audit fees must be paid before the
a. 2002 report is issued c. 2003 field work is started
b. 2003 report is issued d. 2004 field work is started
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93. Inclusion of which of the following in promotional brochure published by a public accounting firm would be most likely to res ult in a
violation of the rules of conduct?
a. Reprints of newspaper articles that praise the firm’s expertise.
b. Services offered and fees for such services including hourly rates and fixed fees
c. Educational and professional attainments of partners
d. Testimonial and endorsements

94. According to the Code of Professional Conduct, a member who has a financial interest in a partnership that invests in a potential
client is considered to have
a. An indirect financial interest in the client c. No financial interest in the client
b. A direct financial interest in the client d. A partial financial interest in the client

95. The Rules of Conduct will ordinarily be considered to have been violated when the member represents that specific consulting
services will be performed for a stated fee and it is apparent at the time of the representation that the
a. actual fee would be substantially higher
b. actual fee would be substantially lower than the fees charged by other members for comparable services
c. fee was a competitive bid
d. member would not be independent
96. In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been
retained as the auditor of a brokerage firm
a. Which owes the CPA audit fees for more than one year
b. In which the CPA has a large active margin account
c. In which the CPA’s brother is the controller
d. Which owes the CPA audit fees for services in the current year and ha just filed a petition for bankruptcy

97. Which of the following most completely describes how the profession has defined independence?
a. Performing an audit from the viewpoint of the public
b. Avoiding the appearance of significant interests in the affairs of an audit client
c. Possessing the ability to act with integrity and objectivity
d. Accepting responsibility to act professionally and in accordance with a professional code of ethics

98. The appearance of independence of a CPA, or that CPA’s firm, could be impaired if the CPA
a. owns a unit in a cooperative apartment house where each unit has a vote in the cooperative, and the CPA, who does not
participate in the management, has been retained as the auditor for the cooperative
b. joins a trade association that is a client and serves in a non management capacity
c. accepts a gift from a client
d. none of the above

99. The Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a
professional engagement except with the consent of his or her client. In which of the situations that follow would disclosure by a CPA
be in violation of the Code?
a. Disclosing confidential information to property discharge the CPA’s responsibilities in accordance with the profession’s
standards.
b. Disclosing confidential information in compliance with a subpoena issued by a court.
c. Disclosing confidential information to another accountant interested in purchasing the CPA’s practice
d. Disclosing confidential information in a review of the CPA’s professional practice by a peer review team.

100.Which of the following fee arrangements is in violation of the Code of Professional Conduct?
a. A fee based on whether the CPA’s report on the client’s financial statements results in the approval of a bank loan
b. A fee based on the outcome of a bankruptcy proceeding
c. A fee based on the nature of the service rendered and the CPA’s particular expertise instead of the actual time spent on the
engagement.
d. A fee based on the charged by the prior auditor.
101.Which of the following describes most completely how the profession defines independence?
a. Performing an audit from the public’s point of view
b. Avoiding the appearance of a significant interest in an audit client’s interest
c. Resisting a client’s reluctance to reveal evidence
d. Accepting responsibility to act professionally and in accordance with a professional Code of Conduct

102.In which of the following circumstances would a CPA be bound to refrain from disclosing confidential information obtained during a
professional engagement?
a. The CPA is issued a summons enforceable by a court order that orders the CPA to present confidential information
b. A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the
information
c. Confidential client information is made available as part of a quality review of the CPA’s practice by a review team
authorized by the PICPA
d. An inquiry by a disciplinary body of a national CPA society requests confidential client information

103.The Code of Professional Conduct would be violated if a member accepted a fee for services and the fee was
a. Fixed by a public authority
b. Based on a price quotation submitted in competitive bidding
c. Based on the result of judicial proceedings
d. Payable after a specified finding was attained

104.Independence is required of a CPA performing


a. Audits, but not any other professional services
b. All attestations services, but not other professional services
c. All attestation and tax services, but not other professional services
d. All professional services
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105.Which of the following statements best describes why the profession of certified public accountants has deemed it essential to
promulgate a code of professional conduct and to establish a mechanism for enforcing observation of the code?
a. A distinguishing mark of a profession is its acceptance of responsibility to the public.
b. A prerequisite to success is the establishment of an ethical code that primarily defines the professional’s responsibility to clients
and colleagues.
c. A requirement of most state laws for the profession to establish a code of ethics.
d. An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession.
106.Which of the following attributes is more closely associated with attestation services performed by a CPA firm than with othe r lines
of professional work?
a. Integrity c. Independence
b. Competence d. Keeping informed in current professional developments

107.In which of the following circumstances would a CPA be considered independent when performing the audit of the financial
statements of a new client for the year ended December 31, 2003?
a. The CPA resigned on January 17, 2003 from the board of directors of the client, prior to accepting the new audit engagement.
b. The CPA continues to hold an immaterial indirect financial interest in the client.
c. The CPA continues to serve as a trustee for the client’s pension plan.
d. The CPA’s spouse owns an immaterial amount of share of common stock in the client.

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

109.Independence of a CPA with respect to a client is not impaired if


a. The CPA has a loan to an officer of the client.
b. The CPA has an immaterial direct interest in the client.
c. The CPA is trustee for the client’s pension plan.
d. The CPA has an immaterial joint, closely held business investment with the client.

110.A CPA firm may not designate itself as “members of the PICPA” unless
a. All of its partners are members of the Institute.
b. Its entire professional staff is members of the Institute.
c. A majority of its professional staff are members of the Institute.
d. At least one partner is a member of the Institute.
111.A CPA’s retention of client records as a means of enforcing payment of an overdue audit fee is an action that is
a. Considered acceptable by the Code of Professional Conduct.
b. III advised since it would impair the CPA’s independence with respect to the client.
c. Considered discreditable to the profession.
d. A violation of generally accepted auditing standards.

112.The Code of Professional Ethics for CPA’s was promulgated by the:


a. Philippine Institute of CPAs c. Securities and Exchange Commission
b. Bureau of internal revenue d. Board of Accountancy

113.A CPA shall not disclose confidential information obtained during an audit engagement in which one of the following situations?
a. When the security of the state so requires
b. With the consent of the client
c. In defense of himself when sued by the client
d. Under the rule against disclosing confidential information

114.One of the following refers to a generally accepted auditing standard:


a. Confirm the cash balances c. Join professional society
b. Exercise due professional care d. Preserve confidential relationship with client

115.Legacy Commercial Inc. engages the services of Mr. C. Dimalanta, CPA, to make a project study on the expanded foot vending
operations of the corporation with the corresponding staffing and compensation package for its executive staff. Dimalanta,
however, has primarily auditing expertise and only in general merchandising operations. Mr. Dimalanta may properly:
a. Accept the engagement and carry it out consistent with generally accepted auditing standards.
b. Accept the engagement but exercise due professional care.
c. Accept the engagement and acquire the necessary competence or consult with established authorities.
d. Decline the engagement for lack of experience or competence in an entirely new line of specialization.
116.Under the provisions of the Code of the Professional Ethics for CPAs, a partner surviving the death or withdrawal of all othe r
partners may continue to practice under the partnership name:
a. For five years after becoming a sole practitioner.
b. For three years after becoming a sole practitioner.
c. For two years after becoming a sole practitioner.
d. For one year after becoming a sole practitioner.

117.A CPA will not offer or render services under an agreement whereby the fee is contingent upon the findings. One of these is
deemed not permissible under the ethics of the profession:
a. Fees granted by the courts
b. Fees determined in tax matters by judicial proceedings.
c. Fees fixed by government agency findings.
d. Fees determined as a percentage of the total amount of authorized bond issues.

118.The CPA in public practice violates the Code of Professional Ethics for CPAs if he accepts a fee which was:
a. Fixed by public authority
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b. Based on a price quotation submitted in competitive bidding.
c. Determined, based on the results of judicial proceedings.
d. Payable after a specified finding was obtained.

119.Upon discovery of irregularities in the client’s tax return that the client refuses to correct, a CPA withdraws from the enga gement.
How should the withdrawing CPA respond if asked by the successor of CPA why the relationship was terminated?
a. “It was a misunderstanding.”
b. “I suggest you get the client’s permission for us to discuss all matters freely.”
c. “I suggest you ask the client.”
d. “I found irregularities in the tax return which the client would not correct.”

120.A CPA’s opinion on financial statements is of little value to those who relied on him unless he:
a. Issues an unqualified opinion.
b. Maintains a program of continuing education.
c. Serves his clients with professional concern for their best interests
d. Maintains his independence.
121.The code of Professional Ethics for CPAs states, in part, that a CPA should maintain a high degree of integrity and objectivity in all
his actuations. Objectivity in said Code refers to a CPA’s ability:
a. To maintain an impartial attitude on all matters which come under the CPA’s review
b. To independently distinguish between accounting practices that are acceptable and those that are not.
c. To be unyielding in all matters dealing with auditing procedures
d. To independently choose between alternate accounting principles and auditing standards.

122.In the absence of pronouncements issued by the ASPC and the PICPA, published statements and guidelines by other authoritative
bodies, like AICPA, IAPC and AFA are the basis of determining generally accepted auditing standards. What affect do these
pronouncements provide in determining the generally accepted auditing standards?
a. Authoritative b. Persuasive c. Alternative d. Parallel

123.Specifically, the board of accountancy is officially represented in the ASPC by:


a. Secretary of the BOA c. Chair, PRC
b. Chair, BOA d. BOA member who handles Auditing theory subject

124.How many members of ASPC are needed to approve the exposed draft or Philippine standards in Auditing as Philippine Standards
on Auditing?
a. Majority of the regular members c. At least ten
b. At least eight d. At least twelve

125.Which of the following is the correct statement?


a. ASPC should normally expose a proposed interpretation of statements.
b. ASPC should normally exposed its opinion on specific queries from a practicing CPA
c. To make the statements on Philippine Standards on auditing operative, the final statement shall be submitted to the board of
accountancy for approval.
d. When it is deemed necessary to expose for a comment on proposed interpretation of statements, the exposure period is
understandably shorter than those of the regular drafts of standards.

126.Which of the following is not presented by the signatories to the joint memorandum of support to the creation and operation of the
auditing standards and practices council?
a. Board of Accountancy.
b. Philippine Institute of Certified Public Accountants (PICPA)
c. Association of Certified Accountants in Public Practices (ACPAPP)
d. Philippine Institute of Certified Public Accountants Foundation, Inc.

END