University of Southern Philippines Foundation

Salinas Drive, Lahug, Cebu City, 6000 Philippines

College of Accountancy
Auditing Theory
Name: ____________________________________ Date: ___________________
Instructions: Shade the letter of the BEST answer on the Bubble Sheet provided. Be wary of
the time and always do your best. Also, Be Honest. 

1. The following statements relate to modifications of the standard audit report:

I. When an auditor is unable to reach a conclusion as to the propriety of management’s
representations, he should consider issuing either a qualifying opinion or a
disclaimer of opinion.
II. When restrictions that significantly limit the scope of the audit are imposed
by the client, the auditor generally should issue an adverse opinion.
III. Qualifying language may be added to the opinion paragraph of the auditor’s
report, but it is never added to the scope paragraph.
IV. A change in accounting principle from one generally accepted accounting
principle to another would not prevent the issuance of an unqualified audit report
provided the auditor approved the change in advance and the effects of the change
were set forth in a note to the financial statements.

State whether the foregoing statements are true or false.

a. All of the statements are true.
b. Only one of the statements is true.
c. Only two of the statements are true.
d. Three of the statements are true.
e. All of the statements are false

2. When an audit report covering financial statements for the year ended December 31, 2016
is dated “March 3, 2017, except for Note 5, as to which the date is March 31, 2017,” the
responsibility of the auditor is:
a. Limited up to March 3, 2017.
b. Limited up to March 31, 2017.
c. Limited up to December 31, 2016.
d. Limited up to March 3, 2017, except for the event disclosed in Note 5,as to which his
responsibility is up to March 31, 2017.

3. If adequate disclosure is not made by the entity regarding substantial doubt about its
ability to continue as a going concern, the auditor should include in his report specific
reference to the substantial doubt as to ability of the company to continue as a going
concern and should express:
a. Unqualified opinion with explanatory paragraph
b. Either an “except for” qualified opinion or an adverse opinion.
c. A disclaimer of opinion.
d. A subject to qualified opinion or adverse opinion.

4. In a case where an auditor observed that the accounting for a certain material item is
not in conformity with generally accepted accounting principles, and that this fact is
prominently disclosed in a footnote to the financial statements, the auditor should
a. Express an unqualified opinion and insert a middle paragraph emphasizing the matter by
reference to the footnote.
b. Disclaim an opinion.
c. Not allow the accounting treatment for this item to affect the type of opinion because
the deviation from generally accepted accounting principle was disclosed.
d. Qualify the opinion because of the deviation from generally accepted accounting
principles.
5. An auditor completed fieldwork on February 10, 2017 for a December 31, 2016 year-end client.
A significant subsequent event occurred on February 22, 2017. In this case, which of the
following report dates would not be appropriate?
a. December 31, 2016.
b. February 10, 2017.
c. February 10, except Note 1, February 22, 2017.
d. February 22, 2017.

6. Does an auditor make the following representations explicitly or implicitly in

a standard audit report on comparative financial statements?
Consistent Application of Examination of Evidence on a
Accounting Principles Test Basis
a. Explicitly Explicitly
b. Implicitly Implicitly
c. Explicitly Implicitly
d. Implicitly Explicitly

7. A client follows full PFRSs for its domestic operations and foreign GAAP for a foreign
subsidiary. The foreign subsidiary is audited by a component auditor, while the group
auditor audits the remainder of the corporation and issues an audit report on consolidated
operations. Which auditor(s) is (are) responsible for evaluating the appropriateness of
the adjustment of the foreign GAAP statements to full PFRSs?
Component auditor Group auditor

a. Yes Yes

b. No Yes

c. Yes No

d. No No

8. According to PSA 200, professional skepticism includes being alert to all of the following
except:
a. Audit evidence that contradicts other audit evidence obtained.
b. Information that brings into question the relevance of documents.
c. Conditions that may indicate possible fraud.
d. All of the above.

9. Negative assurance is not permissible in:

a. reports based upon a review engagement.
b. letters required by security underwriters for data pertinent to SEC registration
statements.
c. reports based on an audit of interim financial statements of a closely held business
entity.
d. reports relating to the results of agreed-upon procedures to one or more specified
elements, accounts, or items of financial statement.

10. The letter of audit inquiry to the client's legal counsel should be mailed only by the
a. Client after the auditor has reviewed it for appropriate content.
b. Auditor after preparation by the client and review by the auditor.
c. Auditor's attorney after preparation by the client and re- view by the auditor.
d. Client after review by the auditor's attorney.
11. Early appointment of the auditor enables preliminary work to be performed by the auditor,
which benefits the client in that it permits the audit to be performed in
a. A more efficient manners.
b. A more effective manner.
c. Accordance with Philippine Standards on Quality Control
d. Accordance with Philippine Standards on Auditing (PSAs).

12. All of the following are false except…

a. PSAs need only be applied to material matters.

b. A CPA acting as auditor cannot depart from the PSA provisions.
c. Interpretations cover implementation issues relating to PSAs and have inferior authority
to the PSAs.
d. The PSAs pronounced by the AASC covers the audit of public sector entities.

13. Two analytical procedures available to the auditor are:

1. Compare current year’s balances with the preceding year
2. Compare detail of a total balance with the preceding year.
Shortcomings of these two procedures are that
a. The first fails to consider growth or decline in business activity and the second
ignores relationships of data to other data
b. The first ignores relationships of data to other data and the second fails to consider
growth or decline in business activity
c. Both fail to consider growth or decline in business activity and ignore relationships
of data
d. It is difficult, time consuming, and therefore costly to perform these procedures

14. If a company does not have sufficient cash and cash-like items to meet its
obligation
a. It is bankrupt
b. It is insolvent
c. The key to its debt-paying ability will be the length of time it takes the company
to convert less liquid current assets into cash
d. The key to its debt-paying ability is the line of credit which it has available
from banks

15. 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

16. External financial statement auditors must obtain evidence regarding what
attributes of an internal audit department if the external auditors intend to rely on
the internal auditor’s work?

Independence from the Audit Committee Competence

a. YES YES

b. NO NO

c. YES NO

d. NO YES
17. Which of the following can affect the independence of operational auditors?

Responsibilities Reporting Structure

a. YES NO

b. NO NO

c. NO YES

d. YES YES

18. Which of the following is not one of the general types of prospective financial
statements included in the attestation standards?

Forecasts Projections Earnings estimates

a. NO NO YES

b. NO YES NO

c. YES YES NO

d. YES NO YES

19. You are a CPA retained by the manager of a cooperative retirement village to do “write-
up work.” You are expected to prepare unaudited financial statements with each page marked
“unaudited” and accompanied by a disclaimer of opinion stating no audit was performed. In
performing the work, you discover that there are no invoices to support a claim for a
P25,000 disbursement. The manager informs you that all the disbursements are proper. What
should you do?
a. Submit the expected statements but omit P25,000 of unsupported disbursements.
b. Include the unsupported disbursements in the statements since you are not expected to
make an audit.
c. Obtain from the manager a written statement that you informed him of the missing
invoices and include his assurance that the disbursements are proper.
d. Notify the owners that some of the claimed disbursements are unsupported and withdraw
if the situation is not satisfactorily resolved

20. Prospective financial statements are for general use or for limited use. General use
refers to use by any third party, whereas limited use refers to use by third parties with
which the responsible party is negotiating directly. Which of the following statements is
not correct?
a. Forecasts can be provided for general use.
b. Forecasts can be provided for limited use.
c. Projections can be provided for general use.
d. Projections can be provided for limited use.

21. Most illegal acts affect the financial statements:

a. only directly.
b. only indirectly.
c. both directly and indirectly.
d. materially if direct; immaterially if indirect.
22. According to the Code of Professional Ethics for CPAs, which of the following fee
arrangement is prohibited?
a. A fee for a review of financial statements that is based on time spent on the
engagement.
b. A fee for a review of financial statements that is based on time spent and a
premium for the risk involved.
c. A fee for a review engagement that is based on a fixed fee of P15,000.
d. A fee for a review engagement that varies depending on the amount of financing that
the company may obtain.

23. When using sampling for tests of controls, which of the following audit consequences
may follow?
a. If sample results indicate that the control is operating effectively, but in fact it is
not, control risk will be assessed too low.
b. If sample results indicate that the control is operating effectively, but in fact it is
not, control risk will be assessed too high.
c. If sample results indicate that the control is not operating effectively, but in fact it
is operating effectively, the audit is likely to be faulty because of reduced substantive
tests.
d. If sample results indicate that the control is not operating effectively, but in fact it
is operating effectively, control risk will be assessed too low.

24. If the projected misstatement in a nonstatistical sampling is P8,000, while the tolerable
misstatement is P9,000, what would an auditor likely conclude?
a. Since the projected misstatement is less than the tolerable misstatement, the account is
not misstated.
b. Since the projected misstatement is less than the tolerable misstatement, the account is
misstated.
c. The risk is high that the account is materially misstated.
d. The analysis has been improperly performed since the projected misstatement is unequal
to the tolerable misstatement.

25. A dual purpose test simultaneously.

a. Functions as a substantive test and as a test of controls.
b. Addresses two different accounts.
c. Functions as an analytical procedure and a substantive test.
d. Substantiates an ending balance and the transactions making up the balance.

26. If all other factors specified in an attributes sampling plan remain constant, decreasing
the tolerable rate and decreasing the risk of assessing control risk too low would have
what effect on sample size?
a. Increase.
b. Remain the same.
c. Decrease.
d. Indeterminate, depends upon exact change being made.
27. Various factors influence the sample size for a substantive test of details of an
account balance. All other factors being equal, which of the following would lead to a
larger sample size?
a. Lower assessment of control risk.
b. Greater reliance on analytical procedures.
c. Smaller expected frequency of misstatements.
d. Smaller measure of tolerable misstatement.

28. Which of the following is likely to be of least importance to an auditor in considering

the internal control in a company with computer processing?
a. The segregation of duties within the computer center.
b. The control over source documents.
c. The documentation maintained for accounting applications.
d. The cost/benefit of data processing operations.
29. To test for unsupported entries in the journals, the direction of audit testing should
be to the:
a. Ledger entries.
b. Journal entries.
c. Original source documents.
d. Financial statements.
30. Which of the following is least likely to be accurate statement concerning
characteristics of an audit?
a. An analysis of inventory turnover addresses whether the proper method of determining
inventory costs--as contrasted to market values--is being applied.
b. Characteristics of the double entry bookkeeping system make it possible to test for
overstated sales when tests of accounts receivable are being performed.
c. The direction of tests for overstatement errors is generally directed from the recorded
entry to source documents.
d. Use of a perpetual rather than a periodic inventory system is likely to affect the nature
of cutoff errors made at year-end.

31. An internal control questionnaire indicates that an approved receiving report is

required to accompany every check request for payment of merchandise. Which of the following
procedures provides the greatest assurance that this control is operating effectively?
a. Select and examine receiving reports and ascertain that the related canceled checks are
dated no earlier than the receiving reports.
b. Select and examine receiving reports and ascertain that the related canceled checks are
dated no later than the receiving reports.
c. Select and examine canceled checks and ascertain that the related receiving reports are
dated no earlier than the checks.
d. Select and examine canceled checks and ascertain that the related receiving reports are
dated no later than the checks.

32. As part of designing and performing procedures to address management override of

controls, auditors must perform which of the following procedures?
Examine all journal entries above Review accounting estimates for
materiality biases

a. Yes Yes

b. No No

c. Yes No

d. No Yes

33. When a compensating control exists, the absence of a key control:

a. is still a major concern to the auditor.
b. could cause a material loss, so it must be tested using substantive procedures.
c. is magnified and must be removed from the sampling process and examined in its
entirety.
d. is no longer a concern because there is no longer a significant deficiency or material
weakness.

34. After making inquiries about credit granting policies, an auditor selects a sample of
sales transactions and examines evidence of credit approval. This test of controls most
likely supports management's financial statement assertion(s) of:
Rights and obligations Completeness

a. Yes Yes

b. Yes No
 c. No Yes

d. No No

35. As a result of tests of controls, an auditor assesses control risk too high. This
incorrect assessment most likely occurred because:
a. Control risk based on the auditor's sample is less than the true operating
effectiveness of the client's control activity.
b. The auditor believes that the control activity relates to the client's assertions
when, in fact, it does not.
c. The auditor believes that the control activity will reduce the extent of substantive
testing when, in fact, it will not.
d. Control risk based on the auditor's sample is greater than the true operating
effectiveness of the client's control activity.

36. The objective of a review of interim financial information of a public entity (issuer)
is to provide an accountant with a basis for reporting whether
a. A reasonable basis exists for expressing an updated opinion regarding the financial
statements that were previously audited.
b. Summary financial statements or pro forma financial information should be included in
a registration statement.
c. The financial statements are presented fairly in accordance with generally accepted
accounting principles.
d. Material modifications should be made to conform with generally accepted accounting
principles.

37. According to Code of Ethics for Professional Accountants, all professional

accountants:
a. should be independent in fact and in appearance at all times.
b. in public practice should be independent in fact and in appearance at all times.
c. in public practice should be independent in fact and in appearance when providing
assurance services.
d. in public practice should be independent in fact and in appearance when providing
auditing, tax, and MAS services.

38. Which of the following is an indicator of possible fraudulent financial reporting for
the purpose of inflating earnings?
a. A ratio analysis discloses: (1) sales of P50 million and (2) cost of goods sold of
P25 million.
b. A cross-sectional analysis of common size statements discloses: (1) the firm's ratio
of cost of goods sold to sales is .4 and (2) the industry average ratio of cost of
goods sold to sales is .5.
c. A cross-sectional analysis of common size statements discloses: (1) the firm's ratio
of cost of goods sold to sales is .5 and (2) the industry average ratio of cost of
goods sold to sales is .4.
d. A trend analysis discloses: (1) sales increases of 50 percent and (2) cost of goods
sold increases of 25 percent.

39. The following are few of the audit procedures taken from an audit program:
I. Confirm accounts payable directly with vendors.
II. Examine vendors’ invoices and other documentation.
III. Examine the internal auditor’s initials on monthly bank reconciliations as an
indication of whether they have been reviewed.
IV. Compare the balance in payroll tax expense with previous years. The comparison
takes the increase in payroll tax rates into account.
 The foregoing audit procedures are classified as Tests of Controls (TOC), Substantive
Tests of Transactions (STT), Analytical Procedures (AP), Tests of Details of Balances
(TDB):
a. STT, TDB, AP, TOC. c. STT, STT, TOC, TOC.

b. TDB, STT, TOC, AP. d. STT, STT, TOC, AP.

40. General CIS controls generally include:
a. Controls over processing and computer data files
b. Organization and management controls
c. Development and maintenance controls
d. Delivery and support controls
e. Monitoring controls
f. Controls over input
g. Controls over output
a. All of the above c. I, II, III, IV and V
b. II, III, IV and V d. II, III and V

41. Complete the statement: "The evidence gathering technique of observation

a. is rarely sufficient by itself."

b. is limited to what the auditor sees."

c. is useful in most parts of the audit."

d. requires the gathering of corroborative evidence."

42. Totals of amounts in computer-recorded data fields, which are not usually added but
are used only for data processing control purposes are called
a. field totals c. hash totals

b. control totals d. record totals

43. The expectation gap is made up of the standards gap and the performance gap. Which of
the following best describes the standards gap?
a. The difference between the public’s assessment of the performance by auditors and what
the standards require of auditors
b. The difference between what current standards require and auditors’ actual performance
c. The difference between the public’s expectation of auditors and what the standards
require of auditors
d. The difference between the public’s expectation of auditors and the public’s
assessment of auditors’ actual performance

44. Which of the following is true concerning fraud and other irregularities?
a. Management is responsible for implementing controls that will prevent and detect
errors and misstatements but not fraud and other irregularities.
b. An auditor’s responsibility is to detect fraud if it was perpetrated by lower-level
employees, but an auditor cannot be expected to detect fraud if was perpetrated by
members of the board of directors.
c. Management is responsible for identifying and complying with laws and regulations that
affect the entity, and detecting illegal acts.
d. When the risk of fraud and other irregularities (inherent risk × control risk) is
deemed to be higher than normal, auditors may have to accept a higher than normal audit
risk.
45. Which of the following statements is true with respect to planning meetings held at
the beginning of an audit engagement and debriefing meetings held at its conclusion?
a. Planning meetings are required by generally accepted auditing standards; debriefing
meetings are not so required.
b. Debriefing meetings are required by generally accepted auditing standards; planning
meetings are not so required.
c. Both planning meetings and debriefing meetings are required by generally accepted
auditing standards.
d. Neither planning meetings nor debriefing meetings are required by generally accepted
auditing standards.

46. Which of the following best describes the relationship between IR, CR, and DR?
a. DR does not vary from one assertion to another.
b. IR, CR, and DR vary from assertion to assertion.
c. IR and CR do not vary from assertion to assertion, but DR does vary from assertion to
assertion.
d. When IR increases, DR decreases.

47. Which of the following is most consistent with a high level of acceptable detection
risk?
a. High control risk and low inherent risk
b. Low control risk and high inherent risk
c. High control risk and high inherent risk
d. Low control risk and low inherent risk

48. Which of the following is true regarding sampling risk?

a. Sampling risk is the risk that the auditor will reject a sample that is representative
of the population.
b. Sampling risk is the risk that the auditor will choose the wrong population when
drawing the sample.
c. Sampling risk is the risk that the sample is too large to be representative of the
population.
d. Sampling risk exists in both statistical and non-statistical sampling methods.

49. Which of the following methods of sample selection are acceptable when using
statistical sampling in an audit of financial statements?
a. Haphazard selection only
b. Random selection, systematic selection, and haphazard sampling only
c. Random selection and systematic selection only
d. Random selection only

50. Which of the following methods of sample selection are the most appropriate when
testing the operating effectiveness of a client’s internal controls?
a. Random selection, systematic selection, and haphazard selection
b. Random selection, block selection, and haphazard selection
c. Random selection, systematic selection, and peso unit sampling
d. Random selection, block selection, and peso unit sampling

51. Sue is conducting an external audit of ABC Company’s financial statements. Joel is an
internal auditor working for ABC. Which of the following should Sue consider when
deciding whether she can rely on Joel’s findings in her audit?
a. Whether Joel has ever worked as an external auditor of financial statements
b. Whether Joel owns any shares in the company that he works for
c. Joel’s level of education and the number of years of experience Joel has as an
internal auditor
d. Whether or not Joel will agree to let Sue have access to his working papers
52. If a client will not disclose in the financial statements and notes information
required to be disclosed by the accounting framework within which the financial
statements were prepared, what should the auditor do?
a. Issue a qualification for a scope violation and provide the required information
within the audit report
b. Issue a qualification for a violation of generally accepted accounting principles and
provide the required information within the audit report
c. Issue a qualification for a violation of generally accepted accounting principles and
provide the required information in the notes to the financial statements
d. Issue a qualification for a violation of generally accepted accounting principles but
not disclose the required information

53. Which of the following statements with respect to comparative financial statements is
true?
a. The auditor’s report must always refer to each period for which financial statements
are presented.
b. The auditor’s report must refer to each period for which financial statements are
presented and on which an audit opinion is expressed.
c. The auditor’s report must refer to each period for which financial statements are
presented only when the comparative period was audited by another auditor.
d. The auditor’s report must refer to both the current and comparative figures for non-
listed entities, but refers only to the current year figures for listed entities.

54. For which engagements are engagement letters required?

a. All engagements
b. Audit engagements only
c. Assurance engagements only
d. All engagements except the preparation of income tax returns

55. The following relates to documentation requirements as far as evaluating the

client’s ICS:
Assessment of control risk
High (Maximum) Low (Below maximum)
Document: I II III IV
Understanding of ICS Yes Yes Yes Yes
Conclusion made Yes Yes Yes Yes
Basis for such assessment No Yes No Yes

From the data above, the correct documentation requirements are

a. I and III
b. II and III
c. I and IV
d. II and IV

56. The “CPA Registration Number” shall be engraved in what part of the CPA’s seal?
a. Upper portion of the space between the bigger and smaller circle.
b. Lower portion of the space between the bigger and smaller circle.
c. Left and right portion of the space between the bigger and smaller circle and in the
middle of the smaller circle.
d. Middle of the smaller circle.
57. The objective of a review of interim financial information is to provide the accountant
with a basis for reporting whether material modification should be made to conform with
PFRSs.

The objective of a review of interim financial information is to provide the accountant

with a basis for reporting whether the financial statements are presented fairly in
accordance with PFRSs.

The objective of a review of interim financial information is to provide the accountant

with a basis for reporting whether the financial statements are presented fairly in
accordance with standards of interim reporting.

a. first and second statements are correct; third statement is not correct.
b. first statement is correct; second and third statements are not correct.
c. all above statements are not correct.
d. first and third statements are correct; second statement is not correct.

58. Contingency fee based pricing of accounting services is:

a. Always strictly prohibited in public accounting practice.
b. Allowed in an engagement to compile financial statements.
c. Not prohibited if associated with report based on agreed-upon procedures.
d. Always considered an act discreditable to the profession.

59. Section 34 of the IRR provides that a foreign CPA shall not be allowed to practice
accountancy in the Philippines unless he/she can prove, in the manner provided by the
rules of court that, by specific provision of law, the country of which he/she is a
citizen, subject or national admits Filipino citizens to the practice of the same
profession without restriction. Which of the following statements concerning foreign
reciprocity is incorrect?
a. A foreign CPA who desires to practice accountancy in the Philippines shall
present/submit a letter or any document signed and under official seal by the
appropriate official of his/her country state requesting the Chairman of the PRC to
allow him/her to practice accountancy in the Philippines
b. By express provision of the law of a foreign CPA’s country/state, Filipino CPAs are
allowed to practice accountancy in his/her country/state on terms of strict and
absolute equality with the citizens or subjects of said country or state.
c. A foreign CPA should submit an authentic or authenticated copy of the law on
reciprocity of his/her country/state officially translated in the English language.
d. If the letter/document and the copy of the law submitted by a foreign CPA are
satisfactory to the BOA, he/she shall be allowed to practice accountancy in the
Philippines but has to apply for accreditation to do so.

60. 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, Antonio Luna, 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, Antonio Luna 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, Antonio,
Antonia, and Antonieta, CPAs).
d. A CPA shall practice only under an individual, firm, or partnership name in
accordance with the Philippine laws and shall not include any fictitious name but
may indicate specialization.
61. The following statements relate to the requirement to complete 12 units of relevant
education subjects for the accreditation of accounting teachers. Which is incorrect?
a. For purposes of compliance, the 12 units may be earned from the undergraduate
education program or from a graduate degree program of any Higher Education
Institution (HEI) duly recognized by CHED.
b. The 12 units may be earned from in-service or in-house trainings on relevant
education subjects offered by schools or training centers.
c. The 12 units may be a combination of in-service trainings and units earned in an
undergraduate or graduate education programs.
d. CPAs who have passed the Teachers Board Exams and are licensed Professional
Teachers should earn the 12 units through in-service or in-house trainings.

62. A special/temporary permit may be issued by the Board of Accountancy (BOA) to the
following persons, except

a. A foreign CPA called for consultation or for a specific purpose which, in the
judgment of the BOA, is essential for the development of the country regardless of
whether there are Filipino CPAs who are qualified for such consultation or specific
purposes.
b. A foreign CPA engaged as a professor, lecturer or critic in fields essential to
accountancy education in the Philippines and his/her engagement is confined to
teaching only.
c. A foreign CPA who is an internationally recognized expert or with specialization in
any branch of accountancy and his/her service is essential for the advancement of
accountancy in the Philippines.
d. A foreign CPA called for consultation or for a specific purpose which, in the
judgment of the BOA, is essential for the development of the country and that there
is no Filipino CPA qualified for such consultation or specific purposes.

63. 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.

64. The term quality review refers to:

a. A study of appraisal by the Board of Accountancy or duly authorized
representatives of one or more aspects of the professional work of affirm or
partnership engaged in the practice of public accountancy.
b. The study and evaluation of a CPA firm’s quality control policies and procedures
by another CPA firm or a team of qualified CPAs.
c. The process of evaluating the CPA staff members for promotion to the partnership
in the firm.
d. The review of the audit working papers by the audit partner or principal to
determine whether the audit was adequately performed and to evaluate whether the
results are consistent with the conclusions presented in the auditor’s report.
65. Winslow Manufacturing Inc., sought a $200,000 loan from National Lending Corporation.
National Lending insisted that audited financial statements be submitted before it
would extend credit. Winslow agreed to this and also agreed to pay the audit fee. An
audit was performed by an independent CPA who submitted has report to Winslow to be
used solely for the purpose of negotiating a loan from National. National, upon
reviewing the audited financial statements decided in good faith not to extend the
credit desired. Certain ratios which as a matter of policy were used by National in
reaching its decision, were deemed too low. Winslow used copies of the audited
financial statements to obtain credit elsewhere. It was subsequently learned that the
CPA, despite the exercise of reasonable care, had failed to discover the embezzlement
scheme by Winslow’s chief accountant. Under these circumstances, what liability does
the CPA have?
a. The CPA is liable to Winslow for any losses Winslow suffered as a result of failure
to discover the embezzlement
b. The CPA is liable to Winslow to repay the audit fee because credit was not extended
by National
c. The CPA is not liable to any of the parties
d. The CPA is liable to third parties wo extended credit t Winslow based upon the
audited financial statements

66. Jane Cox, a shareholder of Mix Corp., has properly commenced a derivative action
against Mix’s Board of Directors. Cox alleges that the Board breached its fiduciary
duty and was negligent by failing to independently verify the financial statements
prepared by management upon which Smart & Co., CPAs, issued an unqualified opinion.
The financial statements contained inaccurate information which the Board relied upon
in committing large sums of money to capital expansion. This resulted in Mix having
to borrow money at extremely high interest rates to meet current cash needs. Within a
short period of time, the price of Mix Corp. stock declined drastically.

Which of the following statements is correct?

a. The Board is liable since any negligence of Smart is automatically imputed to the
Board.
b. The Board is strictly liable, regardless of fault, since it owes a fiduciary duty
to both the corporation and shareholders
c. The Board may avoid liability if it acted in good faith and in a reasonable manner.
d. The Board may avoid liability in all cases where it can show that it lacked
scienter.

67. If a CPA firm is being sued for common law fraud by a third party based upon materially
false financial statements, which of the following is the best defense the accountants
could assert?
a. Lack of privity
b. A disclaimer contained in the engagement letter
c. Contributory negligence on the part of the client
d. Lack of reliance

68. The following statements relate to the engagement partner’s responsibility to conduct
timely reviews of the audit documentation to be satisfied that sufficient appropriate
evidence has been obtained to support the conclusions reached and for the auditor’s
report to be issued. Which is false?
a. The engagement partner should review all audit documentation.
b. The reviews cover critical areas of judgement, especially those relating to
difficult or contentious matters identified during the course of the engagement,
significant risks and other areas the engagement partner considers important.
c. The engagement review partner should document the extent and timing of reviews.
 d. The engagement partner’s review of the audit documentation allows significant
matters to be resolved on a timely basis to his/her satisfaction before the
auditor’s report is issued.

69. 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 auditor’s report that is issued to be
appropriate in the circumstances. Supervision includes the following except
a. Informing the members of the engagement team of their responsibilities.
b. Addressing significant issues arising during the audit engagement, considering
their significance and modifying the planned appropriately.
c. Tracking the progress of the audit engagement
d. Identifying matters for consultation or consideration by more experienced
engagement team members during the audit engagement

70. Which of the following statements regarding the quality control policies and
procedures is incorrect?
a. Quality control policies and procedures should be implemented at both the level of
the audit firm and on an individual audits.
b. The policies and procedures adopted by the individual audit firms should not vary
since PSA 220 prescribed quality control policies and procedures that must be
adopted by all auditing firms.
c. Quality control policies are objectives and goals while quality control procedures
are steps to be taken to accomplish the policies adopted.
d. The audit firm should implement quality control policies and procedures designed
to ensure that all audits are conducted in accordance with PSAs or relevant national
standards and practices.

71. With regard to the integrity of a client, matters to consider include, for example:
 The nature of the client’s operations, including its business practices.
 Information concerning the attitude of the client’s principal owners,
stockholders, key management and those charged with its governance towards
such matters as aggressive interpretation of accounting standards and the
internal control environment.
 Whether the client is aggressively concerned with maintaining the firm’s
fees as low as possible.
 The identity and business reputation of related parties.
a. Yes, no, yes, yes c. yes, no, yes, no
b. Yes, yes, yes, yes d. yes, no, no, yes

72. Engagement supervision policies cover matters such as:

 Tracking the progress of the engagement
 Considering the capabilities and competence of individual members of the
engagement team, whether they have sufficient time to carry out their work,
whether they understand their instructions and whether the work is carried out
in accordance with the planned approach to the engagement.
 Addressing significant matters arising during the engagement, considering their
significance and modifying the planned approach appropriately
 Identifying matters for consultation or consideration by more experienced
engagement team members during the engagement
a. Yes, yes, yes, yes c. yes, no, no , yes
b. Yes, no, yes, no d. yes, no, yes, yes
73. A comfort letter
a. Is written for underwriters.
b. Signed by the independent auditor
c. Provide comfort to the SEC regarding an entity’s first stock offering.
d. Is addressed to the management of the client.

74. Identify the false statement(s):

i. If matters come to the engagement partner’s attention through the firm’s systems
or otherwise that indicate that members of the engagement team have not complied
with relevant ethical requirements, the partner, in consultation with others in
the firm, shall immediately change the members of the engagement team.
ii. When the engagement partner obtains information that would have caused the firm
to decline the audit engagement if that information had been available earlier,
the engagement partner shall decline the engagement and keep the information
confidential.
iii. The engagement partner shall be satisfied that the engagement team, and any
auditor’s external experts, collectively have the appropriate capabilities,
competence and time to perform the audit engagement in accordance with
professional standards and regulatory and legal requirements, and to enable an
auditor’s report that is appropriate in the circumstances to be issued.
a. i and iii c. ii only
b. ii and iii d. i and ii

75. Identify the true statement(s).

i. Review the responsibilities shall be determined on the basis that the work
of a less experienced team member is reviewed on timely basis by a more
experienced team member.
ii. On the date of the auditor’s report, the engagement partner shall, through
a timely review of the audit documentation and discussion with the engagement
team, be satisfied that sufficient appropriate audit evidence has been
obtained to support the conclusions reached and for the auditor’s report to
be issued.
iii. An engagement partner taking over responsibility for the audit during the
course of an audit engagement shall review the work performed to the date of
the change in order to determine that the audit work has been planned and
performed in accordance with professional standards and regulatory and legal
requirements
a. ii and iii c. i and ii
b. ii only d. i only

76. The engagement quality control reviewer shall:

(a) Take responsibility for the engagement team undertaking appropriate
consultation on difficult or contentious matter;
(b) Be satisfied that members of the engagement team have undertaken appropriate
consultation during the course the engagement, both within the engagement team and
between the engagement team and others at the appropriate level within or outside
the firm;
(c) Be satisfied that the nature and scope of, and conclusions resulting from, such
consultations are agreed with the party consulted; and
(d) Determine that the conclusions resulting from such consultations have been
implemented.
a. Yes, yes, yes, yes c. no, yes, no, yes
b. No, no, yes, no d. no, no, no, no
 77. Monitoring of the firm’s system of quality control is performed by competent
individuals and cover:
 Appropriateness of the design of quality controls
 Efficiency of the operation of quality controls.

a. NO, NO c. NO, YES

b. YES, YES d. YES, NO

78. According to the Philippine Accountancy Act of 2004 (RA 9298), any person who shall
violate RA 9298 or any of its implementing rules and regulations as promulgated by the
Board of Accountancy subject to the approval of the PRC, shall, upon conviction, be
punished by a fine
a. Not less than fifty thousand pesos (P50,000), or by imprisonment for a period not
exceeding three (3) years, or both
b. Not less than one hundred thousand pesos (P100,000) or by imprisonment for a period not
exceeding two (2) years, or both
c. Not less than fifty thousand pesos (P50,000), or by imprisonment for a period not
exceeding two (2) years, or both
d. Not less than one hundred fifty thousand pesos (P150,000), or by imprisonment for a
period not exceeding three (3) years or both.

79. What is the hierarchy of data organization, from smallest to largest unit, for a
relational database?
a. Bit, byte, field, record, table, database.
b. Byte, bit, record, field, table, database.
c. Byte, bit, table, field, record, database.
d. Bit, byte, record, field, table, database.
80. In a highly automated information processing system tests of control
a. Must be performed in all circumstances.
b. May be required in some circumstances.
c. Are never required.
d. Are required in first year audits.

81. A flowchart is most frequently used by an auditor in Connection with the

a. Preparation of generalized computer audit plans.
b. Review of the client’s internal control.
c. Use of statistical sampling in performing an audit.
d. Performance of analytical procedures of account balances.

82. Which symbol would be used to represent a computer process?

a. c.

b. d.

83. Duplicate checking of calculations is an example of a corrective control.

Adherence to appropriate procedures to resubmit rejected transactions is an example of
a detective control.
a. True; False
b. True; True
c. False; True
d. False; False
84. The physical count of inventory of a retailer was higher than shown by the
perpetual records. Which of the following could explain the difference?
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 accumulation sheets.
b. An item purchased “FOB shipping point” had not arrived yet at the date of the
inventory count and had not been reflected in the perpetual records.
c. Credit memos for several items returned by customers had not been recorded.
d. No journal entry had been made on the retailer’s books for several items returned
to its suppliers.

85. Which of the following provides the best form of evidence pertaining to the annual
valuation of an investment in which the client owns a 30% voting interest?
a. Historical cost of the investee company’s assets
b. Audited financial statements of the investee company
c. Current fair value of the investee company assets
d. Market quotations of the investee company’s stocks

86. One audit procedure for an audit of facilities and equipment is to test the
accuracy of recorded depreciation. Which of the following is the best source of
evidence that the equipment in question is in service?
a. A review of inventory documentation for the equipment.
b. A comparison of depreciation schedules with the maintenance and repair logs for the
same 84equipment.
c. A comparison of depreciation schedules with a listing of insurance appraisals for
the same equipment.
d. A review of depreciation policies and procedures.

87. In an audit of stockholders’ equity, an auditor is most concerned that

a. Capital stock transactions are properly authorized.
b. All changes in the stockholders’ equity accounts are monitored by an independent
transfer agent and registrar.
c. Stock splits are charged to retained earnings at par or stated value.
d. Dividends declared during the year were approved by the stockholders.

88. Which of the following audit procedures would provide the least relevant evidence
indetermining that payroll payments were made to bona fide employees?
a.Reconcile time cards in use to employees on the job.
b.Test the payroll account bank reconciliation by tracing outstanding checks to the
payroll register.
c. Examine canceled checks for proper endorsement and compare with personnel records.
d. Test for segregation of the authorization for payment from the hire/fire
authorization.

89. The following statements relate to the provision of taxation, internal audit or IT
systems services to audit clients. Which is false?
a. Taxation services, including compliance, planning, provision of formal taxation
opinions, and assistance in the resolution of tax disputes may create a self-review
threat.
b. A self-review threat may be created when a firm, or network firm, provides internal
audit services to an audit client.
c. 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 client’s financial statements may
create a self-review threat.
d. 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.
90. 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 interested parties.
b. Professional accountants who author books or articles on professional subjects may
state their name and professional qualifications; give the name of the
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.

91. ________________ is an individual or organization possessing expertise in a field

other than accounting or auditing, whose work in that field is used by the entity to
assist the entity in preparing the financial statements
a. Auditor’s expert c. Expert
b. Management’s expert d. Specialist

92. Which of the following would least likely affect the appropriateness of evidence
available to an auditor?
a. The sampling method employed by the auditor to obtain a sample of such evidence.
b. The relevance of such evidence to the financial statement assertion being verified.
c. The relationship of the preparer of such evidence to the entity being audited.
d. The timeliness of such evidence.

93. Which of the following should be considered by the auditor when designing and
performing analytical procedures as substantive procedures?
I. The suitability of using substantive analytical procedures given the assertions
II. The reliability of the data, whether internal or external, from which the
expectation of recorded amounts or ratios is developed.
III. Whether the expectation is sufficiently precise to identify a material
misstatement at the desired level of assurance.
IV. The amount of any difference of recorded amounts from expected values that is
acceptable.
a. I, II and III only
b. I, III and IV only
c. II, III and IV only
d. I, II, III and IV
94. The auditor should apply analytical procedures
I. As risk assessment procedures.
II. As substantive procedures.
III. In the overall review at the end of the audit.

a. I and II only
b. II and III only
c. I and III only
d. I, II and III

95. An attitude of professional skepticism means that the practitioner

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

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

97. The two most important qualities for an operational auditor are
a. Independence and competence
b. Competence and technical training
c. Personality and appearance
d. Academic background and sufficient experience

98. AkoSiPinoy Commercial Inc. engages the services of Mr. Leo Catigbak, CPA, to make a
project study on the expanded food vending operations of the corporation with the
corresponding staffing and compensation package for its executive staff. Catigbak,
however, has primarily auditing expertise and only in general merchandising operations.
Decide what Catigbak will do next in accordance with the Code and relevant standards
a. Accept the engagement and carry it out consistent with the standards on auditing
b. Accept the engagement but exercise due professional care
c. Accept the engagement and acquire the necessary competence or consult with
established authorities
d. Decline the engagement for lack of experience or competence in an entirely new
line of specialization

99. Which is usually included in an engagement letter?

A reference to GAAP A reference to GAAS

a. YES YES

b. NO NO

c. YES NO

d. NO YES
100. The engagement letter will do one, some, or all of the following:
1. State whether the CPA will perform audit, review, or compilation services
2. State whether the CPA will perform tax or management advisory or other services
3. State any restriction to be imposed on the CPA’s work
4. Identify deadlines for completing the work
5. State the amount and type of work to be done by client’s personnel in generating
auditor’s work papers
6. State the CPA’s fees for the engagement
7. Inform the client that the CPA does not have responsibility for detecting fraud
The engagement letter will do
a. Numbers 1, 2, 4 and 6
b. Numbers 1, 2, 3, 4 and 6
c. Numbers 1, 3, 5 and 7
d. All seven of the above stated items

Nothing Follows

“It is better to sweat in practice than bleed in actual battle.”