1.

As a result of sampling procedures applied as tests of controls, an auditor incorrectly

assesses control risk higher than appropriate. The most likely explanation for this situation
is that
A. The deviation rate in the auditor's sample is less than the tolerable rate, but the
deviation rate in the population exceeds the tolerable rate.
B. The deviation rates of both the auditor's sample and the population exceed the
tolerable rate.
C. The deviation rates of both the auditor's sample and the population are less than
the tolerable rate.
D. The deviation rate in the auditor's sample exceeds the tolerable rate, but the
deviation rate in the population is less than the tolerable rate.

2. A client decides not to make an auditor's proposed adjustments that collectively are not
material and wants the auditor to issue the report based on the unadjusted numbers.
Which of the following statements is correct regarding the financial statement
presentation?
A. The financial statements do not conform with PFRS.
B. The financial statements contain unadjusted misstatements that should result in a
qualified opinion.
C. The financial statements are free from material misstatement, but disclosure of the
proposed adjustments is required in the notes to the financial statements.
D. The financial statements are free from material misstatement, and no disclosure is
required in the notes to the financial statements.

3. Indicate which changes would require an emphasis of matter paragraph in the audit
report.

The CPA concludes there is The CPA makes reference to the

substantial doubt about the work of an expert to indicate
entity’s ability to continue shared responsibility in an
as a going concern unmodified opinion
A. Yes Yes
B. No Yes
C. Yes No
D. No No

4. If requested to perform a review engagement for an entity in which an accountant has an

immaterial direct financial interest, the accountant is
A. Not independent and, therefore, may issue a review report, but may not issue an
auditor's report.
B. Not independent and, therefore, may not be associated with the entity's financial
statements.
C. Not independent and, therefore, may not issue a review report.
D. Independent because the financial interest is immaterial and, therefore, may issue
a review report.
5. Using your knowledge of the relationships among acceptable audit risk, inherent risk,
control risk, planned detection risk, tolerable misstatement, and planned evidence,
determine the effect on planned evidence (increase or decrease) of changing each of the
following factors, while the other factors remain unchanged.

A B C D
1. An increase in acceptable audit risk Increase Decrease Increase Decrease
2. An increase in inherent risk Decrease Decrease Increase Increase
3. A decrease in control risk Increase Increase Decrease Decrease
4. An increase in planned detection risk Increase Decrease Increase Decrease
5. An increase intolerable misstatement Increase Increase Decrease Decrease

6. Under which of the following circumstances would the expression of a disclaimer of

opinion be inappropriate?
A. The auditor is unable to obtain the audited financial statements of a consolidated
investee.
B. Management does not provide reasonable justification for a change in accounting
principles.
C. The company failed to make a count of its physical inventory during the year and
the auditor was unable to apply alternative procedures to verify inventory
quantities.
D. Management refuses to allow the auditor to have access to the company's
canceled checks and bank statements.

7. As a result of tests of controls, an auditor assessed control risk too low and decreased
substantive testing. This assessment occurred because the true deviation rate in the
population was
A. Less than the risk of assessing control risk too low, based on the auditor's sample.
B. Less than the deviation rate in the auditor's sample.
C. More than the risk of assessing control risk too low, based on the auditor's sample.
D. More than the deviation rate in the auditor's sample.

8. Which of the following statements regarding analytical procedures is not correct?

A. Analytical tests emphasize a comparison of client internal controls to PFRS.
B. Analytical procedures are required on all audits.
C. Analytical procedures can be used as substantive tests.
D. For certain accounts with small balances, analytical procedures alone may be
sufficient evidence.

9. Which of the following is a step in an auditor’s decision to assess control risk at below
maximum?
A. Apply analytical procedures to both financial data and nonfinancial information to
detect conditions that may indicate weak control.
 B. Perform tests of details of transactions and account balances to identify potential
errors and irregularities.
C. Identify specific control procedures that are likely to detect or prevent material
misstatements.
D. Document that the additional audit effort to perform tests of controls exceeds the
potential reduction in substantive testing.

10. During an engagement to review the financial statements of an entity, a practitioner

becomes aware that several leases that should be capitalized are not capitalized. The
practitioner considers these leases to be material to the financial statements. The
practitioner decides to modify the standard review report because management will not
capitalize the leases. Under these circumstances, the practitioner should
A. Disclose the departure from PFRS in a separate paragraph of the practitioner's
report.
B. State in his report that nothing has come to his attention that would cause him to
believe that the financial statements are not presented fairly, in all material
respects, in accordance with PFRS.
C. Express no assurance of any kind on the entity's financial statements.
D. Emphasize that the financial statements are for limited use only.

11. An auditor is auditing a mutual fund company that uses a transfer agent to handle
accounting for shareholders. Which of the following actions by the auditor would be most
efficient for obtaining information about the transfer agent's internal controls?
A. Review reports on internal control placed in operation and its operating
effectiveness produced by the agent's own auditor.
B. Review prior-year workpapers to determine whether the number of transactions
processed by the agent has materially increased.
C. Perform an audit on the internal control function of the agent.
D. Perform tests of controls on a sample of the audited firm's transactions through the
agent.

12. The adverse effects of events causing an auditor to believe there is substantial doubt
about an entity's ability to continue as a going concern would most likely be mitigated by
evidence relating to the
A. Ability to expand operations into new product lines in the future.
B. Feasibility of plans to purchase leased equipment at less than market value.
C. Marketability of assets that management plans to sell.
D. Committed arrangements to convert preferred stock to long-term debt.

13. Audit documentation should possess certain characteristics. Which of the following is one
of the characteristics?
 Audit documentation Audit documentation should be
should be indexed and organized to benefit the client’s
cross-referenced staff
A. Yes Yes
B. No No
C. Yes No
D. No Yes

14. When discussing control risk and the audit risk model, which one of the following
statements is false?
A. The relationship between control risk and evidence is direct.
B. If the auditor concludes that an internal control system is completely ineffective to
prevent or detect errors, he/she would assign a 0% to control risk.
C. The relationship between control risk and detection risk is inverse.
D. Control risk is a measure of the auditor's assessment of the likelihood that errors
will not be prevented or detected by the client's internal control system.

15. A CPA started to audit the financial statements of an entity. After completing certain audit
procedures, the client requested the CPA to change the engagement to a review because
of a scope limitation. The CPA concludes that there is reasonable justification for the
change. Under these circumstances the CPA's review report should include a
A. Statement that a review is substantially less in scope than an audit.
B. Reference to the scope limitation that caused the changed engagement.
C. Description of the auditing procedures that were completed before the
engagement was changed.
D. Reference to the CPA's justification for agreeing to change the engagement.

16. Which of the following statements ordinarily is not included among the written client
representations made by the chief executive officer and the chief financial officer?
A. “Sufficient evidential matter has been made available to the auditor to permit the
issuance of an unmodified opinion.”
B. “There are no unasserted claims or assessments that our lawyer has advised us
are probable of assertion and must be disclosed.”
C. “We have no plans or intentions that may materially affect the carrying value or
classification of assets and liabilities.”
D. “No events have occurred subsequent to the balance sheet date that would require
adjustment to, or disclosure in, the financial statements.”

17. Restrictions imposed by a client prohibit the observation of physical inventories, which
account for 35% of all assets. Alternative audit procedures cannot be applied, although
the auditor was able to examine satisfactory evidence for all other items in the financial
statements. The auditor should issue a(an)
A. “Except for" qualified opinion.
B. Disclaimer of opinion.
 C. Unmodified opinion with a separate Emphasis of Matter paragraph.
D. Unmodified opinion with an explanation in the Auditor's Responsibility paragraph.

18. Auditors may identify conditions during fieldwork that change or support a judgement
about the initial assessment of fraud risks. Which of the following is not a condition which
should alert an auditor that the initial assessment should be changed?
A. Discrepancies in the accounting records
B. Unusual relationships between the auditor and management
C. Missing or conflicting evidence
D. The auditor's lack of independence

19. Reyes, CPA, is planning the audit of Kiko's company. Kiko verbally asserts to Reyes that
all expenses for the year have been recorded in the accounts. Kiko's representation in this
regard
A. Is sufficient evidence for Reyes to conclude that the completeness assertion is
supported for the expenses.
B. Can enable Reyes to minimize his work on the assessment of control risk for the
completeness of expenses.
C. Should be disregarded because it is not in writing.
D. Is not considered a sufficient basis for Reyes to conclude that all expenses have
been recorded.

20. Before accepting an engagement to audit a new client, a CPA is required to obtain
A. An assessment of fraud risk factors likely to cause material misstatements.
B. An understanding of the prospective client's industry and business.
C. The prospective client's signature to a written engagement letter.
D. The prospective client's consent to make inquiries of the predecessor, if any.

21. Which of the following procedures would an accountant most likely perform during an
engagement to review the financial statements of an entity?
A. Review the predecessor accountant's working papers.
B. Inquire of management about related party transactions.
C. Corroborate litigation information with the entity's attorney.
D. Communicate internal control deficiencies to senior management.

22. VGR Corporation has numerous customers. A customer file is kept in disk. Each customer
file contains name, address, credit limit, and account balance. The auditor wished to test
this file to determine whether credit limits are being exceeded. The best procedure for the
auditor to follow would be to
A. Develop test data that would cause some account balances to exceed the credit
limit and determine if the system properly detects such situation.
B. Develop program to compare credit limits with account balances and print out the
details of any account with a balance exceeding its credit limit.
 C. Request a printout of all account balances so they can be manually checked
against the credit limits.
D. Request a printout of a sample account balances so they can be individually
checked against the credit limits.

23. Which of the following is not a valid basis for omitting an audit test?
A. The difficulty and expense involved in testing a particular item.
B. The relative risk involved.
C. The degree of reliance on the relevant internal controls.
D. The relationship between the cost of obtaining evidence and its usefulness.

24. The objective of a reasonable assurance engagement is a reduction in assurance

engagement risk
A. To a level that is acceptable in the circumstances of the engagement as a basis
for a negative form of expression of the practitioner's conclusion.
B. To an acceptably low level in the circumstances of the engagement as a basis for
a positive form of expression of the practitioner's conclusion.
C. To a level that is acceptable in the circumstances of the engagement as a basis
for a qualified form of expression of the practitioner's conclusion.
D. To a very low level in the circumstances of the engagement as a basis for a
disclaimer of the practitioner's conclusion.

25. Which of the following statements would not normally be included in a representation letter
for a review of interim financial information?
A. To the best of our knowledge and belief, no events have occurred subsequent to
the balance sheet and through the date of this letter that would require adjustment
to or disclosure in the interim financial information.
B. We acknowledge our responsibility for the design and implementation of programs
and controls to prevent and detect fraud.
C. We understand that a review consists principally of performing analytical
procedures and making inquiries about the interim financial information.
D. We have made available to you all financial records and data.

26. An auditor believes that there is substantial doubt about an entity's ability to continue as a
going concern for a reasonable period of time. In evaluating the entity's plans for dealing
with the adverse effects of future conditions and events, the auditor most likely would
consider, as a mitigating factor, the entity's plans to:
A. Repurchase the entity's stock at a price below its book value.
B. Issue stock options to key executives.
C. Lease rather than purchase operating facilities.
D. Accelerate the due date of an existing mortgage.

27. Which of the following statements about internal control system is correct?
 A. A properly maintained internal control system reasonably ensures that collusion
among employees cannot occur.
B. The establishment and maintenance of the internal control system is an important
responsibility of the internal auditor.
C. An exceptionally strong internal control system is enough for the auditor to
eliminate substantive tests on a significant account balance.
D. The cost-benefit relationship is a primary criterion that should be considered in
designing an internal control system.

28. Which of the following statements is true?

A. Audit procedures on the sample item will vary as a result of using either statistical
or nonstatistical sampling.
B. Audit procedures on the sample item will not vary as a result of using either
statistical or nonstatistical sampling.
C. The audit procedures will be the same for either statistical or nonstatistical
sampling, but they must be performed differently for each.
D. Statistical sampling requires quantitative audit procedures whereas nonstatistical
sampling requires judgmental audit procedures.

29. When an auditor suspects material misstatement in the financial statements resulting from
fraud, he/she may direct inquiries from the following personnel, except
A. Top executives who initiated, approved, and authorized recording of complex and
unusual transactions.
B. In-house legal counsel.
C. Chief ethics officer or equivalent person.
D. Operating personnel not directly involved in the financial reporting process.

30. As a condition of obtaining a loan from Metro Manila Bank, Maasim Corp. is required to
submit an audited statement of financial position but not the related statements of income,
changes in equity, or cash flows. Maasim would like to engage a CPA to audit only its
statement of financial position. Under these circumstances, the CPA
A. May not audit only Maasim's statement of financial position if the amount of the
loan is material to the financial statements taken as a whole.
B. May not audit only Maasim's statement of financial position if Maasim is not a listed
entity.
C. May audit only Maasim's statement of financial position if the CPA disclaims an
opinion on the other financial statements.
D. May audit only Maasim's statement of financial position if access to the information
underlying the basic financial statements is not limited.