Audit Theory Quizzer

QUESTIONS
1. The Professional Regulatory Board of Accountancy shall be composed of
chairman and (LIST A) members to be appointed by the President of the Phi from a
list of (LIST B) recommendees for each position and ranked by the Commission, from
a list of five (5) nominees for each position submitted by <LIST C>.
LIST A LIST B LIST C
a. 6 5 BOA
b. 7 5 PRC
c. 7 3 PICPA
d. 6 3 APO

2. The PICPA shall submit its nominations with supporting documentation.

a. Within 60 days prior to the expiry of the term of an incumbent member or
chairman
b. Within 90 days prior to the expiry of the term of an incumbent member or
chairman
c. Not later than 60 days prior to the expiry of the term of an incumbent
member or chairman
d. Not later than 90 days prior to the expiry of the term of an incumbent member or
chairman

3. Which of the following statements about the composition of the Board of

Accountancy is incorrect?
a. The four sectors in the practice of accountancy shall as much as possible be
equitably represented in the Board.
b. The Board shall be composed of a chairman and six members.
c. The members of the Board shall be appointed by the President of the Philippines
from a list of three recommendees for each position and ranked by the
Commission, from a list of five nominees for each position submitted by
Accredited Professional Organization (APO).
d. The Board shall elect a vice- chairman from among its members to serve
for a term of three years.

4. The following statements relate to the term of office of the chairman and the
members of the Board of Accountancy (BOA).
I. No person who has served two (2) successive complete terms shall be eligible
for reappointment until the lapse of one (1) year
II. Appointment to fill up an unexpired term is not to be considered a complete term
III. A person may serve in the Board of Accountancy for eight consecutive years.
IV. A person may serve in the Board for more than 12 years.
a. All statements are true c. Only IV is false
b. All statements are false d. Only I and II are true
5. Which of the following is not among the qualifications of a member of the Board of
Accountancy?
a. He/ She must have at least 10 years of experience in the practice of accountancy
b. He/ She must be a natural-born CPA and a resident of the Philippines
c. He/ She must not be a director or officer of the accredited national professional
organization at the time of appointment.
d. He/ She must not have any direct or indirect pecuniary interest in any school
offering BS Accountancy degree

6. Which of the following is not a valid ground for suspension or removal of a member of
the Board of Accountancy?
a. Being investigated of a crime involving moral turpitude.
b. Neglect of duty or incompetence
c. Manipulating the CPA licensure examination results
d. Violating RA9298

7. The standard setting body created by the PRC to promulgate accounting

standards that will be generally accepted in the Philippines is known as
a. Financial Reporting Standards Council (FRSC)
b. Auditing Standards and Practices Council (ASPC)
c. Accounting Standards Council (ASC)
d. Auditing and Assurance Standards Council (AASC)

8. The Financial Reporting Standards Council shall be composed of a chairman and

a. 14 members b. 17 members c. 8 members d.15 members

9. The sector that is most represented in the Auditing and Assurance Standards
Council is the
a. Commerce and Industry
b. Academe
c. Public Practice
d. Government

10. Which of the following is not represented in the FRSC?

a. ACPAPP
b. FINEX
c. Commission on Audit
d. Securities and Exchange Commission

11. The term of office of each member of AASC and FRSC is

a. 2 years, renewable
b. 4 years, non-renewable
c. 3 years, non-renewable
d. 3 years, renewable
 12. Which of the following statements about Accounting Standard Setting Council
is correct?
a. The accounting standard setting body is known as Accounting Standards Council
(ASC).
b. The accounting standard setting body is composed of a chairman and fifteen
members.
c. The chairman and members of the standard setting council shall be
appointed by the Commission upon the recommendation of the Board in
coordination with the accredited national professional organization.
d. The public accounting practice is the sector that is most represented in the
accounting standard setting council.

13. Which of the following best describes the function of Auditing and Assurance
Standards Council?
a. To monitor full compliance by auditors to PSAs
b. To promulgate auditing standards, practices and procedures that shall be
generally accepted by the accounting profession in the Philippines
c. To assist the Board of Accountancy in conducting administrative proceedings on
erring CPAs in public practice
d. To undertake continuing research on both auditing and financial accounting in
order to make them responsive to the needs of the public

14. The following are represented both to the Financial Reporting Standards
Council (FRSC) and Auditing and Assurance Standards Council (AASC), except
a. Commission on Audit
b. Bureau of Internal Revenue
c. Securities and Exchange Commission
d. Board of Accountancy

15. The following statements relate to the RA9298. Which statement is true?
a. Within two years, subject to certain conditions, the Board of Accountancy may
order the reinstatement of a CPA whose certificate of registration has been
revoked
b. The Professional Regulation Commission has the authority to remove any
member of the Board of Accountancy for negligence, incompetence, or any other
just cause
c. Insanity is not a ground for proceeding against a CPA.
d. No person shall be appointed as a member of the Board of Accountancy
unless he has been in the practice of accountancy for at least 10 years
among others

16. The following are the qualifications of applicants for CPA Examinations except
I. Must be a natural born Filipino citizen
II. Must be a BS Accountancy degree holder
III. Must be of good moral character
IV. Must be at least 21 years old
 a. I only b. II and IV c. IV only d. I and IV
17. Which of the following statements is correct?
a. Any candidate who fails in two (2) complete CPA board examinations will no
longer be allowed to take another set of examination
b. Any candidate who fails in two (2) complete CPA board examinations shall be
disqualified from taking another set of examinations unless he/she submits
evidence to the satisfaction of the Board that he/she enrolled in and completed at
least 21 units of subjects given in the licensure examination
c. The examination in which the candidate was conditioned and the removal
examination on the subject in which he/she failed shall be counted as one
complete examination
d. The refresher course should be completed within two (2) years from the
preceding examination

18. The Board of Accountancy shall submit to the PRC the ratings obtained by each
candidate within ____ days after the examination, unless extended for just cause.
a. 10 b. 5 c. 2 d. 3

19. Which of the following shall be issued to a candidate who passes the CPA licensure
examination?
a. Certificate of accreditation to practice public accountancy and PRC ID.
b. Personal identification card and a certificate of accreditation to practice public
accountancy
c. Certificate of registration and professional identification card
d. Certificate of full compliance and PRC ID

20. The Board of Accountancy may issue certificate of registration professional

identification card to any successful examinee:
a. Of unsound mind
b. Convicted by a court of political offense
c. Guilty of immoral or dishonorable conduct
d. Who has falsely represented himself herself in his /her application examination

21. The following statements relate to roster of CPAs. Identify the incorrect statement.
a. A roster showing the names and place of business of all registered CPAS shall
be prepared and updated by the Board.
b. Copies of the roster shall be made available to any party as may be deemed
necessary
c. The Board, upon approval of the Commission, may delegate the preparation of
this roster to the APO
d. The publication of the roster in the official gazette or in any major
newspaper of public circulation shall be deemed compliance with the
requirement of RA 9298.
22. Any person who shall violate any of the provisions of the Accountancy Act or any of
its implementing rules and regulations promulgated by the Board of Accountancy
subject to the approval of the PRC, shall upon conviction, be punished by
a. Lethal injection
b. A fine of not more than P50,000
c. An imprisonment for a period not exceeding two years
d. Both b and c

23. PRC- CPE Council differs from AASC and FRSC in that
a. PRC-CPE Council members are appointed by the Commission.
b. PRC-CPE Council is composed of a chairman and 14 members
c. The chairperson of PRC-CPE Council is elected by the members of the
Board from among themselves.
d. PRC-CPE Council members are co-terminus with the President of the Philippines

24. Which of the following statements is correct about the PRC-CPE Council?
a. The Council shall be composed of six members and a chairperson
b. The Council shall be composed of two members and a chairperson.
c. The members of the Council shall be appointed by the Commission upon
recommendation of the Board in coordination with APO
d. The chairperson and members of the Council shall have a term of three years
renewable for another term

25. Which statement is correct regarding CPE requirements for renewal of professional
license?
a. The total CPE credit units required for CPAs shall be sixty (60) units for three (3)
years, provided that a minimum of twenty (20) credit units shall be earned in
each year
b. A registered professional shall be permanently exempted from CPE requirements
upon reaching the age of 60 years old
c. A registered professional who is working abroad shall be temporarily exempted
from compliance with CPE requirement during his/her stay abroad, provided that
he/she is has been out of the country for at least one year immediately prior to
the date of renewal
d. Those who failed to renew professional licenses for a period of five (5)
continuous years from initial registration, or from last renewal shall be
declared delinquent.

26. Unless otherwise exempted, registered CPAs in the practice of accountancy who
have not completed the CPE requirements shall
a. Be dropped from the roster of CPAs
b. Not be allowed to renew their professional licenses.
c. Present evidence to the satisfaction of the Board that they have the necessary
knowledge, skills and experience to discharge their professional responsibility
d. Submit a letter addressed to the Board indicating the reasons for not complying
with the CPE requirements
27. How many credit units per hour will be earned by a participant in a CPE seminar?
a. 1 CU per hour c. 3 CU per hour
b. 5 CU per hour d. 2 CU per hour

28. Who is not permitted by RA 9298 to practice public accountancy?

a. A general partnership
b. A limited liability partnership.
c. A sole proprietorship
d. A corporation, whose stockholders are all CPAs.

29. According to RA 9298, if a partner in a two-member partnership dies, the

surviving partner may continue to practice as an individual under the existing firm title
which includes the deceased partner's name
a. For a period of time not to exceed five years.
b. For a period of time not to exceed two years
c. Indefinitely
d. Until the partnership pay-out to the deceased partner's estate is terminated

30. A CPA shall not practice under a firm name that includes or indicates the following,
except
a. Fictitious name
b. Specialization
c. Misleading as to the type of organization
d. Name(s) of past partner(s) in the firm name of the successor partnership

31. Below are names of four CPA firms and pertinent facts relating to them.
Unless otherwise indicated, the individuals named are CPAs and partners and there
are no other partners. Which firm name and related facts indicate a violation of the
Philippine Accountancy Act of 2004?
a. Binhi, Binti and Bigti, CPAs (Bigti died about 5 years ago; Binhi and Binti are
continuing the firm.)
b. Tiu and Ramos, CPAs (The name of R. Hermosilla, CPA, a third partner is
omitted from the firm name.)
c. Bitay and Bigo, CPAs (Bitay died about three years ago; Bigo is continuing
the firm as a sole practitioner.)
d. R. Hermosilla and Co., CPAs (R. Hermosilla has ten other partners who are all
CPAs)

32. CPAs, firms and partnerships of CPAs engaged in the practice of public
accountancy including partners and staff members thereof, shall register with the
Commission and the Board, such registration to be renewed every three years on
or before
a. April 15 c. December 31
b. September 30 d. May 31
33. Which of the following is not one of the functions of the Board of Accountancy?
a. To supervise the registration, licensure and practice of accountancy in the
Philippines
b. To issue, suspend, revoke, or reinstate the certificate of registration for the
practice of the accountancy profession
c. To prescribe and/or adopt a code of ethics for the practice of accountancy
d. To adopt an official seal of the Commission.

34. The letters "CPA" 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.

35. Which of the following is not one of the functions of the Board of Accountancy
as specified in the RA 9298?
a. To look from time to time into the conditions affecting the practice of the
accountancy profession.
b. To appoint members of the AASC
c. To investigate violations of RA 9298 and its IRRs
d. To determine and prescribe minimum requirements leading to the admission of
candidates to the CPA examination.

36. A CPA certificate is evidence of

a. Independence as a professional
b. Basic competence at the time of certification
c. Membership in the accredited association.
d. Completion of continuing professional education program.

37. A certificate of accreditation shall be issued to certified public accountants in

public practice only upon showing, in accordance with rules and regulations
promulgated by the Board and approved by the Commission, that such registrant
has acquired how many years of meaningful experience in any of the areas of public
practice?
a. One b. Two c. Three d. Four

The next two questions are based on the following information:

38. R and Co. CPAs, was approved on April 30, 2016, the registration shall expire on
a. September 30, 2018. c. April 30, 2019
b. September 30, 2019 d. December 31, 2018

39. Which of the following is one of the reasons for not issuing a certificate of
registration to a successful examinee? The individual
a. Is of unsound mind
b. Had been guilty of immoral and dishonorable conduct.
 c. Had been convicted by a court of a criminal offense involving moral turpitude
d. All of the given choices.

40. A CPA whose certificate of registration has been revoked

a. Can no longer be reinstated.
b. Is automatically reinstated as CPA by the PRC after two years if he has years if
he has acted in an exemplary manner
c. May be reinstated by the Professional Regulation Commission after two years if
he has acted in an exemplary manner
d. May be reinstated as a CPA by the Board of Accountancy after two years if
he has acted in an exemplary manner

41. A Professional Identification Card bearing the registration number, date of

issuance, expiry date, duly signed by the chairperson of the Commission, shall be
issued to every registrant renewable every
a. Two years c. Four years
b. Three years d. Five years

QUESTIONS
1. The degree of certainty that the practitioner has attained and wishes to convey is
called
a. Assurance c. Audit risk
b. Precision d. Materiality

2. Which of the following is not included among the Auditing and Assurance Standards
Council (AASC) pronouncements?
a. Philippine Standards on Auditing
b. Philippine Standards on Review Engagements
c. Philippine Standards on Compilation Engagements
d. Philippine Standards on Related Services

3. According to AASC pronouncements, audit related services include:

a. Review c. Examination
b. Consultancy d. Compilation

4. Which of the following services is covered by AASC pronouncements?

a. Taxation c. Management Advisory
b. Consultancy d. Agreed-upon Procedures

5. Which of the following services provides the highest level of assurance?

a. Audit c. Review
b. Agreed-upon Procedures d. Compilation

6. When performing a review of financial statements, a CPA is required

a. Apply analytical procedures and make inquiries from third parties by sending
confirmation letters.
 b. Assess the effectiveness of the client's accounting and internal control systems.
c. Obtain corroborative evidence to support management's response.
d. Obtain understanding of the client’s business and industry.

7. Which of the following procedures is not included in a review engagement of a non-

public entity?
a. inquiries of management
b. inquiries regarding subsequent events
c. procedures designed to identify unusual fluctuations
d. studying and evaluating the client's internal control

8. The objective of an agreed upon-procedures engagement is for the to:

a. Carry out procedures of an audit nature to which the auditor and entity and
any appropriate third parties have agreed and to report factual findings
b. Carry out procedures of a review nature to which the auditor and entity and any
appropriate third parties have agreed and to report the factual findings.
c. Carry out procedures of a review nature and to express limited assurance based
on those agreed procedures.
d. Carry out procedures of an audit nature and is express limited assurance.

9. A report on factual findings is the end product of the auditor when performing
a. Examination c. Review
b. Audit d. Agreed-upon Procedures

10. Engagement to apply agreed-upon procedures on certain accounts within a

financial statement may be accepted provided
a. The CPA has expressed opinion on the financial statements taken as whole.
b. The CPA takes full responsibility for the adequacy of the procedures to be
performed.
c. The CPA provides only a limited assurance about the reliability of the financial
statements.
d. The distribution of the report is limited only to specified parties involved.

11. A CPA may accept an engagement to apply agreed-upon procedures on specified

element of financial statements provided
a. An audit of the financial statements taken as a whole is also performed.
b. The CPA will issue an opinion on the specified element.
c. An examination of the specified element is also conducted
d. The client takes full responsibility for the procedures to be perform

12. Which of the following ethical principles does not apply to an agreed- upon
procedure engagement?
a. Independence
b. Confidentiality
c. Professional behavior
d. Professional competence and due care
13. What level of assurance does an accountant give on a compilation report?
a. None c. Low
b. Moderate d. High

14. Which of the following procedures would an accountant most likely perform in a
compilation engagement?
a. assemble financial information
b. apply analytical procedures
c. assess risk components
d. test the accounting records

15. The procedures employed in doing compilation are

a. Designed to enable the accountant to express a limited assurance
b. Designed to enable the accountant to express a negative assurance
c. Not designed to enable the accountant to express any form of assurance
d. Less extensive than review procedures but more extensive than agreed-upon
procedures

16. Which of the following is incorrect about a compilation engagement?

a. The CPA uses his auditing expertise to collect, classify and summarize
financial information
b. The engagement ordinarily entails reducing detailed data to a manageable and
understandable form
c. The CPA should exercise due care
d. The procedures performed do not enable the accountant to express any form of
assurance

17. What level of assurance does the CPA provide under the following engagements?
Agreed-upon
Audit Review procedures Compilation
a. High Moderate None None
b. High Limited Low None
c. Moderate Moderate None None
d. Reasonable Negative None Low

18. The use if negative assurance in audit reports on financial statements is

a. A violation of the professional standards.
b. Encouraged by PICPA
c. A help in clarifying the degree of responsibility being assumed by the
auditor
d. Properly located in the opinion paragraph of the unqualified report

19. When an independent CPA is associated with the financial statements of publicly
held company but has not audited or reviewed the financial statements, the
appropriate form of report that must be issued must include
 a. negative assurance c. disclaimer of opinion
b. compilation opinion d. explanatory paragraph

20. The statement that nothing came to our attention which would indicate that these
statements are not fairly presented expresses which of the following?
a. disclaimer of opinion c. negative confirmation
b. negative assurance d. adverse report

21. A CPA who is not independent may issue a

a. Review report
b. Special report
c. Report expressing a qualified opinion
d. Compilation report

22. A CPA should perform analytical procedures when engaged to

I Audit II Review III Compile
a. Yes, Yes, Yes c. No, Yes, No
b. Yes, Yes, No d. Yes, No, No

23. Auditors of public companies are often requested to report on interim financial
statements. A review of interim financial information consists primarily of
a. Vouching and tracing c. Inquiries and analytical procedures
b. Reconciling and reperforming d. Confirmation and observation

24. What level of assurance does an auditor provide in an engagement to perform

agreed-upon procedures?
a. High but not absolute assurance
b. Limited assurance
c. Moderate assurance
d. No assurance

25. When an independent CPA assists in preparing the financial statements of a

publicly held entity, but has not audited or reviewed them, the CPA should issue a
disclaimer of opinion. The CPA has no responsibility to apply any procedures
beyond
a. Ascertaining whether the financial statements are in conformity with generally
accepted accounting principles
b. Determining whether management has elected to omit substantially all required
disclosures
c. Documenting that internal control is not being relied on.
d. Reading the financial statements for obvious mistakes in application that
internal control of PFRS.

26. Which of the following procedures is ordinarily performed by CPA in a review

engagement of a non-public entity?
 a. Analytical procedures designed to test the accounting records by obtaining
corroborating evidential matter summarizing transactions control
b. Inquiries concerning entity's procedures for recording and
c. Analytical review designed to evaluate the effectiveness of internal
d. Inquiries from client's lawyers about pending litigation, claims and

27. In which of the following reports should an accountant not express

a. A standard review report on financial statements of a nonpublic entity
b. A standard compilation report on financial statements of a nonpublic
entity
c. A standard comfort letter on financial information included in a registration
statement of a public entity
d. A standard review report on interim financial statements of a public entity

QUESTIONS
1. An audit of financial statements is conducted to determine if the
a. organization is operating efficiently and effectively
b. auditee is following specific procedures or rules set down by some higher
authority
c. overall financial statements are stated in accordance with specified criteria
d. auditee has complied with government laws and regulations
2. The subject matter of any audit consists of
a. Financial statements
b. Economic data
c. Assertions about economic actions and events
d. Operating data
3. The criteria for evaluating quantitative information vary. For example, in the audit
of historical financial statements by CPA firms, the criteria is usually
a. The Philippine Standards on Auditing
b. Financial reporting standards
c. Regulations of the Bureau of Internal Revenue
d. Regulations of the Securities and Exchange Commission
4. Most of the independent auditor's work in formulating an opinion financial
statements consists of
a. Studying and evaluating internal control
b. Obtaining and examining evidential matter
c. Examining cash transactions
d. Comparing recorded accountability with assets
5. An audit that involves obtaining and evaluating evidence about h activities in
relation efficiency and effectiveness of an entity's operating to specified
objectives is a(n):
a. internal audit
b. external audit
c. operational audit
d. compliance audit
 e. financial statement audit
6. An audit that involves obtaining and evaluating evidence in order t determine
whether certain financial or operating activities of an entity conform to specified
conditions, rules, or regulations is a(n)
a. internal audit
b. external audit
c. operational audit
d. compliance audit
e. financial statement audit
7. In financial statement audits, the audit process should conform with
a. Philippine Standards on Auditing
b. Financial reporting standards
c. The audit program
d. The auditor's judgment.
8. Which of the following has the primary responsibility for the fairness the
representations made in the financial statements?
a. client's management
b. Independent auditor
c. Audit committee
d. PICPA
9. The auditor communicates the results of his or her work through the medium of
the
a. Engagement letter
b. Management letter.
c. Audit report.
d. Financial statements.
10. Which of the following types of audit uses as its criteria laws and regulations?
a. Operational audit
b. Financial statement audit
c. Compliance audit
d. Performance audit
11. Which of the following best describes why an independent auditor is asked to
express an opinion on the fair presentation of financial statements?
a. It is difficult to prepare financial statements that fairly present a company's
financial position and changes in cash flows without the expertise of an
independent auditor
b. It is management's responsibility to seek available independent aid in the
appraisal of the financial information shown in its financial statements
c. The opinion of an independent party is needed because a company may
not be objective with respect to its own financial statements
d. It is a customary courtesy that all stockholders of a company receive an
independent report on management's stewardship in managing the affairs of
the business.
12. Which of the following types of auditing is performed most commonly by CPA's
on a contractual basis?
a. Internal auditing
 b. Government auditing
c. Income tax auditing
d. External auditing
13. The primary purpose of an independent financial statement audit is
a. to provide a basis for assessing management's performance
b. comply with state regulatory requirements
c. assure management that the financial statements are unbiased and free from
material error
d. provide users with an unbiased opinion about the fairness of
information reported in the financial statements
14. Independent auditing can best be described as a
a. subset of accounting
b. professional activity that attests to the fair presentation of financial
statements
c. professional activity that measures and communicates financial accounting
data
d. regulatory activity that prevents the issuance of improper financial information
15. The reason an independent auditor gathers evidence is to
a. form an opinion on the financial statements
b. detect fraud
c. evaluate management
d. evaluate internal controls
16. The primary goal of the CPA in performing the attest function is to
a. Detect fraud
b. Examine individual transactions so that the auditor may certify as to their
validity
c. Determine whether the client's assertions are fairly stated.
d. Assure the consistent application of correct accounting procedures
17. Any service in which the CPA firm issues a written communication that expresses
a conclusion with respect to the reliability of a written assertion that is the
responsibility of another party is a(n)
a. accounting and bookkeeping service
b. attestation service
c. management advisory service
d. tax service
18. Which of the following criteria is unique to the auditor's attest function?
a. General competence
b. Familiarity with the industry in which the client operates.
c. Due professional care
d. Independence
19. In general, internal auditors' independence will be greatest when the report
directly to the
a. vice-president for finance
b. corporate controller
c. audit committee of the board of directors
d. corporate stockholders
20. The independent audit is important to readers of financial statement
a. Determine the future stewardship of the management of the
b. Measures and communicates financial and business data involved
c. Involves the objective examination of and reporting on
d. Reports on the accuracy of all information in the financial
21. The primary reason for an audit by an independent, external audit firm is
a. To satisfy governmental regulatory to requirements
b. To guarantee that there are no misstatements in the financial statements
c. To provide increased assurance to users as to the fairness of the
financial statements
d. To ensure that any fraud will be discovered.
22. Which one of the following is not among the conditions that give rise to demand
by external users for independent audits of financial statements?
a. remoteness of users
b. complexity of subject matter
c. the securities acts, administered by the SEC
d. potential conflict of interest between users and preparers of the statements
consequence for making decisions
23. Which of the following best describes the reason why an independent auditor
reports on financial statements?
a. A management fraud may exist and it is more likely to be detected by
independent auditors.
b. Different interests may exist between the company preparing the
statements and the persons using the statements.
c. A misstatement of account balances may exist and is generally corrected as
the result of the independent auditor's work.
d. A poorly designed internal control system may be in existence.
24. Which of the following statements does not describe a condition that creates a
demand for auditing?
a. Conflict between an information preparer and a user e can result biased
information
b. Information can have substantial economic consequences for decision-maker
c. Expertise is often required for information preparation and verification
d. Users can directly assess the quality of information.
25. Which of the following statements does not properly describe a limitation of an
audit?
a. Many audit conclusions are made on the basis of examining a sample of
evidence.
b. Some evidence supporting peso representation in the financial statements
must be obtained by oral or written representation of management
c. Fatigue and carelessness can cause auditors to overlook pertinent evidence.
d. Many financial statement assertions cannot be audited
26. Which of the following statements does not properly describe an element of
theoretical framework of auditing?
a. The data to be audited can be verified
 b. Short-term conflicts may exist between managers who prepare the data and
auditors who examine the data.
c. Auditors act on behalf of the management
d. An audit benefits the public accordance
27. General purpose financial statements may be prepared in accordance with the
following framework except.
a. Generally accepted accounting principles in the Philippines
b. Other authoritative and comprehensive bases of Accounting
c. Generally accepted auditing standards in the Philippines.
d. International accounting standard
28. The form of assurance issued when auditing financial statements
a. High b. Negative c. Positive d. Reasonable
29. The auditor's satisfaction as to the reliability of as assertion being made by one
party is called:
a. Assurance c. Precision
b. Audit risk d. Materiality level
30. Which of the following is not one of the reasons why absolute assurance cannot
be attained when auditing financial statements?
a. The auditor does not examine all evidence available.
b. Most of the evidence gathered by the auditor is persuasive and not conclusive
c. Auditors may commit mistakes in the application of his judgment.
d. Many financial statement assertions cannot be audited.
31. Which of the following is not one of the limitations of an audit?
a. the use of testing
b. error in the application of judgment
c. inherent limitation of internal control
d. scope limitations imposed by the entity
32. Which of the following is incorrect about responsibility for financial statements?
a. Management is responsible for fair presentation of the financial statements
b. Auditor is responsible for expressing an opinion on the financial statements
c. Audit of financial statements does not reduce management's responsibility
d. Fair presentation of financial statements is an implicit part of the
auditor's responsibility

QUESTIONS
1. Material misstatements may emanate from all of the following except
a. Fraud
b. Errors
c. non-compliance with laws and regulations
d. limitations of the audit
2. The responsibility for the detection and prevention of errors, fraud and
noncompliance with laws and regulations rests with
a. Auditor
b. audit committee
c. Internal audit department
d. management and those charged with governance
3. The management responsibility to detect and prevent fraud and error is
accomplished by
a. Implementing adequate quality control system.
b. Having an annual audit of financial statements
c. Establishing a control environment and implementing adequate internal
control policies and procedures
d. Signing the management representation letter.
4. An intentional act by one or more individuals among management employees, or
third parties which results in a misrepresentation of financial statements is
referred to as
a. Error
b. Fraud
c. illegal act
d. noncompliance
5. The primary factor that distinguishes errors from fraud is
a. whether the underlying cause of misstatement relates to misapplication of
accounting principles or to clerical processing
b. whether the misstatement is perpetrated by an employee or by a member of
management
c. whether the misstatement is concealed
d. whether the underlying cause of misstatement is intentional or
unintentional
6. The term "error" refers to unintentional misrepresentation of financial information.
Examples of errors are when
I. Assets have been misappropriated
II. Transactions without substance have been recorded
III. Records and documents have been manipulated and falsified
IV. The effects of the transactions have been omitted from the records
a. all of the above statements are true
b. only statements I and III are true
c. all of the above statements are false
d. only statements II and IV are true
7. Which of the following is an example of an error?
a. Defalcation
b. Suppression or omission of the effects of transactions from the records or
documents.
c. Recording of transactions without substance
d. Oversight that resulted in an incorrect accounting estimates
8. Which of the following is an example of fraud?
a. Errors in the application of the accounting principles.
b. Clerical errors in accounting data underlying the financial statements.
c. Misinterpretation of facts that existed when financial statements were
prepared
d. Misappropriation of assets or group of assets.
9. Which of the following statements best identifies the two types of fraud?
a. Theft of assets and employee fraud
 b. Misappropriation of asset and defalcation
c. Management fraud and fraudulent financial reporting
d. Fraudulent financial reporting and misappropriation of assets.
10. Fraudulent financial reporting is often called
a. Management fraud
b. theft of assets
c. defalcation
d. employee fraud
11. Auditing standards require that auditors be aware of relevant factors relating to
fraud. Which of the following statements about fraud is false?
a. Fraud frequently involves a pressure or an incentive to commit fraud and a
perceived opportunity to do so
b. Two types of fraud relevant to the auditor include material misstatements
arising from fraudulent financial reporting and material misstatements arising
from misappropriation of assets
c. Fraud involves actions of management but excludes the actions of
employees or third parties
d. An audit rarely involves the authentication of documentation; thus, fraud may
go undetected by the auditor
12. The auditor's best defense when material misstatements in the financial
statements are not uncovered in the audit is that
a. the audit was conducted in accordance with generally accounting principles
b. client is guilty of contributory negligence.
c. the audit was conducted in accordance with PSA.
d. the financial statements are client's responsibility
13. The auditor has considerable responsibility for notifying users as to whether or
not the statements are properly stated. This responsibility imposes upon the
auditor a duty to
a. be an insurer of the fairness in the statements
b. be a guarantor of the fairness in the statements.
c. be equally responsible with management for the preparation of the financial
statements
d. provide reasonable assurance that material misstatements will be
detected.
14. Which of the following statements is incorrect?
a. The responsibility for the prevention and detection of fraud and error rests
with management and those charged with governance
b. The auditor is not and cannot be held responsible for the detection of
fraud or error.
c. In planning an audit, the auditor should assess the risk that fraud or error may
cause the financial statements to contain material misstatements
d. The risk of not detecting material fraud is higher than the risk of not detecting
a material misstatement arising from error.
15. In distinguishing between the detection of a material management fraud and an
equally material error, audits
a. should be expected to provide the same degree of assurance
 b. cannot be expected to provide the same degree of assurance
c. provide no assurance of detecting either
d. should provide complete assurance of detection
16. The likelihood of detecting error is ordinarily higher than that of detecting fraud
because
a. Errors cause the auditor to contain material misstatements while fraud does
not.
b. The auditor designs audit procedures to detect material errors but no
procedures are designed to detect material fraud
c. Fraud is usually accompanied by acts designed to conceal its existence
d. Fraud is usually accompanied by noncompliance with laws and regulations
17. Which of the following statements is true?
a. It is usually easier for the auditor to uncover fraud than errors.
b. It is usually easier for the auditor to uncover errors than fraud.
c. It is usually equally difficult for the auditor to uncover errors or
d. Usually, none of the above statements is true.
18. Which of the following statements about fraud or error is incorrect?
a. The auditor is not and cannot be held responsible for the prevention of fraud
and error.
b. The responsibility for the prevention and detection of fraud and error rests
with management.
c. The auditor should plan and perform the audit with an attitude of professional
skepticism, recognizing that conditions or events may be found that fraud or
error may exist.
d. The likelihood of detecting fraud is ordinarily higher than that of
detecting error
19. Which of the following is a category of risk factors that should be considered in
relation to misstatements arising from mi
a. Industry conditions
b. Operating characteristics
c. Management characteristics
d. Controls.
20. Which of the following is a category of risk factors that should be considered in
relation to misstatements arising from fraudulent financial reporting?
a. Susceptibility of assets to misappropriation
b. Assets that can be easily be converted to cash
c. Industry conditions
d. Internal Controls.
21. The auditor is most likely to presume that a high risk of defalcation exists if
a. The client is multinational company that does business in numerous foreign
countries
b. The client does business with several related parties
c. Inadequate segregation of duties places an employee in a position to
perpetrate and conceal fraud.
d. Inadequate employee training results in lengthy EDP exception reports each
month
 22. The risk of fraudulent financial reporting increases in the presence of
a. Incentive systems based on operating income
b. Improved control systems.
c. Substantial increases in sales.
d. Frequent changes in suppliers
23. If the auditor is unable to determine whether fraud or error has occurred because
of limitations imposed by the circumstances, the auditor would most likely issue a
report that contains
a. An unqualified opinion
b. an unqualified opinion with an emphasis of a matter paragraph
c. a qualified opinion
d. an adverse opinion
24. Should the auditor uncover circumstances during the audit that may cause
suspicions of management fraud, the auditor must
a. Issue an adverse opinion.
b. issue a disclaimer
c. evaluate their implications and consider the need to modify audit
procedures withdraw from the engagement

QUESTIONS
1. The primary responsibility for establishing and maintaining an internal control
structure rests with
a. The external auditors
b. The internal auditors
c. Management
d. The controller or the treasurer

2. The fundamental purpose of an internal control structure is to

a. Safeguard the resources of the organization
b. Provide reasonable assurance that the objectives of the organization are
achieved
c. Encourage compliance with organization objectives.
d. Ensure the accuracy, reliability, and timeliness of information.

3. One of the auditor's major concerns is to ascertain whether internal control is

designed to provide reasonable assurance that
a. Profit margins are maximized, and operational efficiency is optimized
 b. The chief accounting officer reviews all accounting transactions
c. Corporate morale problems are addressed immediately and effectively
d. Financial statements are fairly presented

4. When considering internal control in a financial statement audit, the independent

external auditor is primarily concerned with
a. Detecting all errors
b. Determining the effectiveness of operations
c. Assessing the level of control risk
d. Determining the efficiency

5. An auditor would most likely be concerned with internal control structure policies and
procedures that provide reasonable assurance about the
a. Efficiency of management's decision-making process
b. Appropriate prices the entity should charge for its products
c. Methods of assigning production tasks to employees
d. Entity's ability to process and summarize financial data

6. In the auditor's consideration of an entity's internal control structure, the auditor is

basically concerned that the controls provide reasonable assurance that
a. Operational efficiency has been achieved in accordance with management plans
b. Errors and irregularities have been prevented or detected
c. Controls have not been circumvented by collusion
d. Management cannot override the controls

7. Internal control can provide only reasonable assurance of achieving entity control
objectives. One factor limiting the likelihood of achieving those objectives is that
a. The auditor's primary responsibility is the detection of fraud
b. The board of directors is active and independent
c. The cost of internal control should not exceed its benefits
d. Management monitors internal control
8. When considering the internal control structure, an auditor should be aware of the
concept of reasonable assurance which recognizes that
a. Procedures requiring segregation of duties may be circumvented by employee
collusion should management override.
b. Establishing and maintaining the internal control structure is an important
responsibility of management
c. The cost of an entity's internal control structure should not exceed the
benefits expected to be derived
d. Adequate safeguards over access to assets and records should permit an entity
to maintain proper accountability

9. Inherent limitations in an internal control structure must be considered in evaluating

its effectiveness in preventing and detecting errors and irregularities. Inherent limitations
do not include
a. Misunderstanding of instructions, mistakes of judgment, personal carelessness,
distraction, or fatigue.
b. Incompatible functions performed by the same person.
c. Collusion among employees.
d. Management override of certain policies or procedures.

10. Which of the following best describes an inherent limitation that should be
recognized by an auditor when considering the potential effectiveness of an internal
control structure?
a. Procedures whose effectiveness depends on segregation of duties can be
circumvented by collusion.
b. The competence and integrity of client personnel provide an environment
conducive to control and provides assurance that effective control will be
achieved.
 c. Procedures designed to assure the execution and recording of transactions in
accordance with proper authorizations are effective against irregularities
perpetrated by management
d. The benefits expected to be derived from effective internal control usually do not
exceed the cost of such control.

11. When considering the effectiveness of a system of internal accounting control, the
auditor should recognize that inherent limitations do exist. Which of the following is an
example of an inherent limitation in a system of internal accounting control?
a. The effectiveness of procedures depends on the segregation of employee duties.
b. Procedures are designed to assure the execution and recording of transactions
in accordance with management's authorization.
c. In the performance of most control procedures, there are possibilities of
errors arising from mistakes in judgment
d. Procedures for handling large numbers of transactions are processed by
electronic data processing equipment

12. An effective internal control structure

a. Reduces the need for management to review exception reports on a day to
day basis.
b. Eliminates risk and potential loss to the organization.
c. Cannot be circumvented by management.
d. Is unaffected by changing circumstances and conditions encountered by the
organization

13. An effective system of internal control

a. Cannot be circumvented by management
b. Can reduce the cost of an external audit
c. Can prevent collusion among employees
d. Eliminates risks and potential loss to the organization
14. The internal control structure cannot be designed to provide reasonable assurance
that
a. Transactions are executed in accordance with management's authorization.
b. Irregularities will be eliminated.
c. Access to assets is permitted only in accordance with management's
authorization.
d. The recorded accountability for assets is compared with the existing assets at
reasonable intervals

15. When an organization has a strong internal control structure, management can
expect various benefits. The benefit least likely to occur is
a. Reduced cost of an external audit
b. Elimination of employee fraud
c. Availability of reliable data for decision-making purposes and protection of
important documents and records
d. Some assurance of compliance with government laws.

16. Which of the following best describes the interrelated components of internal
control?
a. Organizational structure, management, philosophy, and planning
b. Control environment, risk assessment, control activities, information and
communication systems, and monitoring
c. Risk assessment, backup facilities, responsibility accounting, and natural laws
d. Internal audit and management's philosophy and operating style.

17. Which of the following is not an element of an entity's internal control structure?
a. Control risk
b. Control activities
c. Information and communication
d. The control environment
18.. The overall attitude and awareness of an entity's board of directors concerning the
importance of the internal control structure usually is reflected in its
a. Computer-based controls
b. System of segregation of duties
c. Control environment
d. Safeguards over access to assets

19. Which of the following factors are included in an entity's control environment?
Audit Assignment of Management Operating
Committee Responsibility Style
a. YES YES NO
b. YES NO YES
c. NO YES YES
d. YES YES YES

20. When obtaining an understanding of an entity's control environment, an auditor

should concentrate on the substance of management's policies and procedures rather
than their form because
a. The auditor may believe that the policies and procedures are inappropriate for
that particular entity
b. The board of directors may not be aware of management's attitude toward the
control environment
c. Management may establish appropriate policies and procedures but not act
on them
d. The policies and procedures may be so ineffective that the auditor may assess
control risk at the maximum level

21. In evaluating the design of the entity's internal control environment, the auditor
considers the following elements and how they have been incorporated into the entity's
processes. Such elements would include all of the following except
a. Integrity and ethical values
 b. Commitment to competence
c. Organizational structure
d. Information and communications systems

22. Proper segregation of functional responsibilities in an effective structure- of internal

control calls for separation of the functions of
a. Authorization, execution, and payment
b. Authorization, recording, and custody
c. Custody, execution, and reporting
d. Authorization, payment, and recording

23. Which of the following activities would be an example of Physical Control?

a. Access to computer facilities and records is limited to authorized
personnel.
b. Training programs are conducted to develop competence of newly hired
personnel
c. Control and subsidiary accounts are reconciled on a regularly scheduled basis
d. Blank stock of all purchase orders and sales invoices are pre-numbered

24. The policies and procedures that help ensure that management directives are
carried out are referred to as the:
a. Control environment
b. Control activities
c. Monitoring of controls
d. Information system

25. Which of the following is-not an example of specific control activities?

a. Participation of those charged with governance
b. Authorization of transactions
c. Segregation of Duties
d. Performance Reviews
26. The process of evaluating the quality of internal control overtime is known as
a. Risk assessment
b. Monitoring
c. Performance reviews
d. Operational audit

27. An auditor's consideration about internal control is whether

a. a specific control prevents or detects and corrects, material misstatements
in classes of transactions, account balances or disclosures, and their
related assertions.
b. a specific control contributes to efficiency and effectiveness of entity's operation.
c. the control reasonably ensures that the entity complies with government laws
and regulations.
d. the control prevents collusion among employees.

28. Which of the following internal control objectives would be most relevant to the
audit?
a. Operational objective
b. Compliance objective
c. Financial reporting objective
d. Administrative control objective

29. Internal control in small businesses is less effective than that of large entities. This
weakness can be compensated by
a. maintaining an adequate segregation of duties
b. creating a separate internal audit department
c. owner's participation in the management and operations of the business.
d. Having an annual audit of financial statements
30. Which of the following is true about the auditor's communication of material
weaknesses noted during the audit of financial statements?
a. The communication should be in writing
b. No communication is necessary
c. Oral communication may be made provided it is documented in the
working papers
d. The communication would-ordinarily be done orally.

31. A small entity may use less formal means to ensure that internal control objectives
are achieved. For example, extensive accounting procedures, sophisticated accounting
records, or formal controls are least likely to be needed if
a. Management is closely involved in operations
b. The entity is involved in complex transactions
c. The entity is subject to legal or regulatory requirements also found in larger
entities
d. Financial reporting objectives have been established

32. The primary responsibility for establishing and maintaining adequate accounting and
internal control systems rests with
a. The external auditors
b. The internal auditors
c. Management
d. The controller or the treasurer

33. In an audit of financial statements, the auditor is only concerned with those policies
and procedures within accounting and internal control systems that
a. Reflect management's philosophy and operating style
b. Affect management's financial statement assertions
c. Provide adequate safeguards over access to assets
d. Enhance management's decision-making processes
34. Internal controls relating to the accounting system are concerned with achieving
objectives. Which of the following is not one of those objectives?
a. Transactions are executed in accordance with management's general or specific
authorization.
b. Controls cannot be circumvented by management.
c. Access to assets and records is permitted only in accordance with management's
authorization.
d. Recorded assets are compared with the existing assets at reasonable intervals
and appropriate action is taken regarding any difference.

35. Accounting an internal control system cannot provide management with conclusive
evidence that objectives are reached because of inherent limitations. Such limitations
do not include.
a. Management's usual requirement that the cost of an internal control does not
exceed the expected benefits to be derived.
b. Most internal controls tend to be directed at non-routine transactions
rather than routine transactions.
c. The potential for human error due to carelessness, distraction, mistakes of
judgment and the misunderstanding of instructions.
d. The possibility that a person responsible for exercising an internal control could
abuse that responsibility, for example, a member of management overriding an
internal control.

36. Which of the following is an element of internal control system?

Control Environment Control Activities
a. YES YES
b. YES NO
c. NO NO
d. NO YES
37. Which of the following factors would least likely affect the entity' control
environment?
a. The function of the board of directors and its committees.
b. Management's philosophy and operating style.
c. The entity's organizational structure and methods of assigning authority and
responsibility.
d. Entity's policy of limiting access to assets and records.

38. The auditor uses his understanding of accounting and internal control systems
together with the inherent and control risks assessments to do all of the following except
a. Identify the types of misstatements that could occur
b. Consider factors that affect the risk of material misstatements
c. Design appropriate audit procedures
d. Evaluate the effectiveness of the accounting and control systems.

39. The auditor should obtain evidence to support any assessment of control risk which
is less than high. The lower-the assessment of control risk, the more support the auditor
should obtain that accounting and internal control systems are suitably designed and
operating effectively. This evidence can be obtained by performing
a. Tests of control c. Analytical procedures
b. Substantive tests d. Dual-purpose tests

40. Tets of controls do not normally include

a. Inquiry b. Observation c. Inspection d. Confirmation

41. When obtaining an understanding of the accounting and internal control systems to
plan the audit, the auditor obtains knowledge of the
Design of the accounting and Operation of Accounting and internal
internal control systems control systems
a. YES . YES
b. YES NO
 c. NO NO
d. NO YES

42. Which of the following statements is incorrect about walk-through tests?

a. It involves tracing a few transactions through the. accounting systems.
b. This procedure may be treated as part of tests of control.
c. The nature and extent of walk-through tests performed by the auditor are
such that they alone would provide sufficient appropriate audit evidence to
support a control risk assessment which is less than high.
d. This procedure is performed to determine whether the controls are implemented
by the client.

43. The auditor's understanding of the accounting and internal control systems
significant to the audit is ordinarily obtained through previous experience with the entity.
In addition, the auditor may perform the following procedures, except
a. inquiries of appropriate management, supervisory arid other personnel at various
organizational levels within the entity, together with reference to documentation,
job descriptions and flow charts
b. inspection of documents and records produced by the accounting and internal
control system
c. observation of the entity's activities and operations, including observation of the
organization of computer operations, management personnel and the nature of
transaction processing.
d. Re-performance of internal control procedures.

44. The auditor should obtain an understanding of the accounting system sufficient to
identify and understand the following except
a. operating effectiveness of the control
b. major classes of transactions in the entity's operations
c. how such transactions are initiated
 d. significant accounting records, supporting documents and accounts in the
financial statements

45. The auditor is not required to document in the audit working papers
a. The understanding obtained of the entity's accounting and internal control
systems
b. The assessment of control risks
c. The basis for the conclusions, if control risk is assessed at less than high level
d. The basis for the conclusions, if control risk is assessed a high level

46. Which of the following statements is incorrect about tests of controls?

a. Tests of control are performed to obtain audit evidence about the effectiveness of
the design of the accounting and internal control systems
b. Tests of control are performed to obtain audit evidence about the effectiveness
operation of the internal controls throughout the period.
c. Some of the procedure performed to obtain the understanding of the accounting
and internal control systems may not have been specifically planned as tests of
control design but may provide audit evidence about the effectiveness of internal
controls relevant to certain assertions
d. Tests of controls are performed to enhance the auditor's understanding of
the client's internal control system.

47. Which of the following is correct when the auditor assess control risk at the
maximum level?
a. The auditor should document the basis for his assessment
b. The auditor should perform tests of controls
c. The auditor should document his conclusion that control risks is at the
maximum level.
d. The auditor need not document his understanding of internal control
48. Internal control in small businesses is less effective than that of large entities. This
weakness can be compensated by
a. maintaining an adequate segregation of duties
b. creating a separate internal audit department
c. owner's participation in the management and operations of the business.
d. Having an annual audit of financial statements

49. Which of the following is true about the auditor's communication of material
weaknesses noted during the audit of financial statements?
a. The communication should be in writing
b. No communication is necessary
c. Oral communication may be made provided it is documented in the
working papers
d. The communication would ordinarily be done orally.

50. In gaining an understanding of the internal control structure, the auditor may trace
several transactions through the control process. The primary purpose of this task is to
a. Replace substantive tests
b. Detect irregularities
c. Determine the effectiveness of the control procedures
d. Determine whether the controls have been placed in operation

51. As part of understanding the internal control structure, an auditor is not required to
a. Consider factors that affect the risk material misstatement
b. Ascertain whether internal control structure policies and procedures have been
placed in operation
c. Identify the types of potential misstatements that can occur
d. Obtain knowledge about the operating effectiveness of the internal control
structure
52. In obtaining an understanding of an entity's internal control activities that are
relevant to audit planning, an auditor is required to obtain knowledge about the
a. Design of the activities pertaining to the internal control components
b. Effectiveness of the activities are currently being applied
c. Consistency with which the activities are currently being applied
d. Controls related to each principal transaction class and account balance

53. Identify the correct statement

a. As part of understanding the internal control structure, an auditor is not required
to consider factors that affect the risk of material misstatement.
b. As part of understanding the internal control structure, an auditor is not required
to determine whether policies and procedures have been placed in operation.
c. As part of understanding the internal control structure, an auditor is not required
to identify the types of potential misstatements that can occur.
d. As part of understanding the internal control structure, an auditor is not
required to obtain knowledge about the operating effectiveness of the
internal control structure.

54. The reliance placed on substantive tests in relation to the reliance placed on internal
control varies in a relationship that is ordinarily
a. Parallel
b. Direct
c. Inverse
d. Equal
55. After gaining an understanding of the control structure, the auditor may attempt to
assess control risk at less than the maximum. For this purpose, the auditor should (l)
identify specific control structure policies and procedures that are likely to prevent or
detect material misstatements in the relevant financial statements assertions and (2)
perform tests of controls. The purpose of these tests is to
a. Assure that the auditor has an adequate understanding of the control structure
b. Evaluate the effectiveness of such policies and procedures
 c. Provide recommendations to management to improve the control structure
d. To evaluate inherent risk

56. Assessing control risk at below the maximum most likely would involve
a. Changing the timing of substantive tests by omitting interim-date testing and
performing the tests at year-end
b. Identifying specific internal control structure policies and procedures
relevant to specific assertions
c. Performing more extensive substantive tests with larger sample sizes than
originally planned
d. Reducing inherent risk for most of the assertions relevant to significant accounts
balances

57. For certain controls, such as segregation' of duties, documentary evidence may not
exist. An auditor would most likely test the procedures by
a. Reperformance and corroboration
b. Observation and inquiry
c. Inspection and vouching
d. Confirmation and recomputation

58. Based on a study and evaluation completed at an interim date, the auditor
concludes that no significant internal accounting control weaknesses exist. The records
and procedures would most likely be tested again at year-end if
a. Compliance tests were not performed by the internal auditor during the remaining
period
b. The internal accounting control system provides a basis for reliance in reducing
the extent of substantive testing
c. The auditor used non-statistical sampling during the interim period compliance
testing
d. Inquiries and observations lead the auditor to believe that conditions have
changed
59. An auditor may decide 'to assess control risk at the maximum level for certain
assertions because the auditor believes
a. Sufficient evidential matter to support the assertions is likely to be available
b. Evaluating the effectiveness of policies and procedures is inefficient
c. More emphasis on tests of controls, than substantive tests is warranted
d. Considering the relationship of assertions to specific account balances is more
efficient

60. Which of the following statements with respect to the independent auditor's
evaluation of internal control is correct?
a. The auditor should decrease control testing when weaknesses in cash receipts
are mitigated by strong controls in cash disbursement procedures.
b. The auditor should increase control testing when weaknesses in billing
procedures are mitigated by strong controls in collection procedures.
c. The auditor generally should not evaluate the overall effectiveness of internal
control, but should separately evaluate each of the transaction cycles.
d. The auditor should evaluate all internal control weaknesses before determining
the control procedures that should prevent or detect errors or irregularities.

61. Assessing control risk at below the maximum level would involve
Identifying potentially reliable controls Performing tests of controls
a. Yes Yes
b. Yes No
c. No No
d. No Yes

62. Tests of controls are designed to obtain evidence about the effectiveness of the
a. design and operation of internal control
b. design of internal control
c. operation of internal control
 d. implementation of internal control

63. Tests of controls may include all of the following except

a. Inspection
b. Inquiry
c. Reperformance
d. Reconciliation

64. The auditor may decide to perform some tests of control during an interim visit in
advance of the period end. However, the auditor cannot rely on the results of such test
without considering the need to obtain further audit evidence relating to the remainder of
the period. Factors to be considered in deciding whether to perform tests of controls for
the remaining period would include all of the following except:
a. The results of the interim tests.
b. The length of remaining period.
c. Whether any changes have occurred in the accounting and internal control
systems during the remaining period.
d. The results of substantive tests

65. When should obtaining understanding of the entity's internal control the auditor
obtain knowledge about the system's:
Design Implementation Operating effectiveness
a. Yes Yes Yes
b. Yes Yes No
c. Yes No No
d. Yes No Yes

66. Which of the following would an auditor least likely perform when obtaining
understanding of the entity's accounting and internal control svstems?
a. Inquiries of appropriate personnel
b. Inspection of documents and record
 c. Observation of the entity's activities and operations
d. Reperformance of internal control

67. To be able to assess the attitude, awareness and actions of top management and
directors regarding the importance of control, the auditor should obtain understanding of
the client's
a. business and industry
b. accounting systems
c. control procedures
d. control environment
1. When control risk is assessed at the maximum level, the auditor should document his
Understanding of Conclusion that control Basis for
internal control risk is at the maximum concluding that
components level control risk is at a
high level
a. Yes Yes Yes
b. Yes Yes No
c. Yes No No
d. No Yes No

2. When control risk is assessed at less than high level, the auditor should document his
Understanding of Assessment of Basis for assessing
internal control control risk control risk at less
components that high level
a. Yes Yes Yes
b. Yes Yes No
c. Yes No No
d. No Yes No
3. After studying and evaluating a client's existing internal control, an auditor has
concluded that the policies and procedures are well designed and functioning as
intended. Under these circumstances, the auditor would most likely
a. Perform further control tests to the extent outlined in the audit program.
b. Determine the control policies and procedures that should prevent or detect
errors and fraud.
c. Set detection risk at a higher level than would be set under conditions of
weak internal control.
d. Set detection risk at a lower level than would be set under conditions of weak
internal control.

4. The auditor would most likely assess control risk at a high level when
a. It would be efficient to perform test of control
b. the entity's accounting and internal control systems are not effective
c. the auditor wishes to rely on the entity's internal control systems.
d. The auditor wants to restrict substantive tests.

5. In assessing control risk, the auditor must, as a minimum

a. Perform tests of all significant controls.
b. Obtain an understanding of the design and implementation of the client's
internal control.
c. Obtain an understanding of the design of the client's internal control.
d. Obtain an understanding of the design, implementation, and operating
effectiveness of the client's internal control.

6. An auditor assesses control risk because it

a. Is relevant to the auditor's understanding of the control environment
b. Provides assurance that the auditor's materiality levels are appropriate
c. Indicates to the auditor where inherent risk may be the greatest
d. Affects the level of detection risk that the auditor may accept
7. Which of the following statements concerning control risk is correct?
a. When control risk is at the maximum level, an auditor is required to
document the basis for that assessment
b. Control risk may be assessed sufficiently low to eliminate substantive-testing for
significant transaction classes
c. When assessing control risk an auditor should not consider evidence obtained in
prior audits about the operation of control procedures
d. Assessing inherent and control risks are usually performed simultaneously.

8. An auditor may decide to assess control risk at the maximum level for certain
assertions because the auditor believes
a. Control policies and procedures are unlikely to pertain to the assertions
b. The entity's control environment, accounting system, and control procedures are
interrelated
c. Sufficient evidential matter to support the assertions is likely to be available
d. More emphasis on tests of controls than substantive tests is warranted

9. Which of the following is a step in an auditor's decision to assess control risk at below
the maximum?
a. Apply analytical procedures to both financial data and nonfinancial information to
detect conditions that may indicate weak controls
b. Perform tests of details of transactions and accounts balances to identify
potential errors and irregularities
c. Identify specific internal control policies and 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. Which of the following statements best describes the entity's risk assessment
process?
 a. Entity's process of identifying business risks relevant to financial reporting
objectives and deciding about actions to address those risks.
b. Entity's assessment of audit risks affecting the financial statements.
c. Entity's process of evaluating the risks of misstatements due to fraud.
d. Entity's assessment of risks that internal control may fail to detect misstatements
affecting the financial statements.

11. The preliminary assessment of control risk should be high, unless the auditor
Is able to identify controls relevant to the Plans to perform tests of
assertion which are likely to detect or control to support that
prevent material misstatements assessment
a. YES YES
b. YES NO
c. NO NO
d. NO YES

12. As the acceptable level of detection risk decreases the auditor may
a. perform tests of control at year-end rather than at interim
b. increase the level of inherent and control risks
c. Design more effective substantive procedures
d. Use larger sample size for tests of controls

13. The risk that the auditor may express an incorrect opinion on the financial
statements is called
a. inherent risk b. control risk c. detection risk d. audit risk

14. The susceptibility of an account to misstatements assuming no internal control is

referred to as the
a. inherent risk b. control risk c. detection risk d. audit risk

15. When planning a financial statement audit, the auditor should assess inherent
risk at the
Financial statement Account balance or transaction
level class level
a. YES YES
b. YES NO
c. NO NO
d. NO YES

16. Which of the following are considered control environment factors?

Detection Human Detection Human
Risk Resources Risk Resources
Policies Policies
And Practices And
Practices
a. YES YES c. NO YES
b. YES NO d. NO NO

17. The auditor ordinarily assesses control risk at a high level for some or all
assertions when:
The entity's internal control is Evaluating the effectiveness of the
effective control would not be efficient
a. YES YES
b. YES NO
c. NO NO
d. NO YES

18. Which of the following statements is not true about the auditor's assessment of
inherent risk when planning a financial statement audit?
a. In developing the overall audit plan, the auditor should assess inherent risk at the
financial statement level.
 b. In developing an audit program, the auditor should assess inherent risk at the
account balance or transaction class level.
c. The auditor can make a separate or combined assessment of inherent and
control risk.
d. The auditor's assessment of inherent risk is influenced by the condition of
the client's accounting and internal control systems.

19. When the auditor determines that detection risk regarding a financial statement
assertion for a material account balance or class of transactions cannot be reduced to
an acceptable level, the auditor's report should express
a. Either qualified or adverse opinion
b. Either qualified or disclaimer of opinion
c. An unqualified opinion with emphasis of a matter paragraph
d. A negative assurance.

20. Assessing control risk at below the maximum most likely would involve
a. Changing the timing of substantive tests by omitting interim-date testing and
performing the tests at year-end
b. Identifying specific internal control- structure policies and procedures
relevant to specific assertions
c. Performing more extensive substantive tests with larger sample sizes than
originally planned
d. Reducing inherent risk for most of the assertions relevant to significant accounts
balances

21. Tests of controls are designed to obtain evidence to support the auditor's
assessment of control risk
a. at a high level
b. at less than high level
c. at zero level
 d. at the maximum level

QUESTIONS
Revenue and Receipts Transaction Cycle
1. Transaction authorization within an organization may be either specific or general.
An example of specific transaction authorization is the
a. Establishment of requirements to be met in determining a customer's credit limit.
b. Setting of automatic reorder points for material or merchandise.
c. Approval of a detailed construction budget for a warehouse.
d. Establishment of sales prices for products to be sold to any customer.

2. The use of fidelity bonds protects a company from embezzlement losses and also
a. Protects employees who make unintentional errors from possible monetary
damages resulting from such errors.
b. Allows the company to substitute the fidelity bonds for various parts of internal
accounting control.
c. Reduces the company's need to obtain expensive business interruption
insurance.
d. Minimizes the possibility of employing persons with dubious records in
positions of trust.

3. It is important for the CPA. to. consider the competence of the audit clients'
employees because their competence bears directly and importantly upon the
a. Cost/benefit relationship of the system of internal control.
b. Achievement of the objectives of the system of internal control.
c. Comparison of recorded accountability with assets.
d. Timing of the tests to be performed.

4. Which of the following control procedures may prevent the failure to bill customers
for some shipments?
 a. Each shipment should be supported by a pre-numbered sales invoice that
is accounted for.
b. Each sales order should be approved by authorized personnel.
c. Sales journal entries should be reconciled to daily sales summaries.
d. Each sales invoice should be supported by a shipping document.

5. For the most effective internal control, monthly bank statements should be received
directly from the banks and reviewed by the
a. Controller.
b. Cash receipts accountant.
c. Cash disbursement accountant.
d. Internal auditor.

6. Immediately upon receipt of cash, a responsible employee should

a. Record the amount in the cash receipts journal.
b. Prepare a remittance listing.
c. Update the subsidiary accounts receivable records.
d. Prepare a deposit slip in triplicate.

7. Which of the following most likely would be the result of ineffective internal control
policies and procedures in the revenue cycle?
a. Final authorization of credit memos by personnel in the Sales Department
could permit an employee defalcation scheme.
b. Fictitious transactions could be recorded, causing an understatement of
revenues and an overstatement of receivables.
c. Irregularities in recording transactions in the subsidiary accounts could result in a
delay in goods shipped.
d. Omission of shipping documents could go undetected, causing an
understatement of inventory.
8. Upon receipt of customers' checks in the mailroom, a responsible employee should
prepare a remittance listing that is forwarded to the cashier. A copy of the listing
should be sent to the
a. Internal auditor to investigate the listing for unusual transactions.
b. Treasurer to compare the listing with the monthly bank statement.
c. Accounts receivable bookkeeper to update the subsidiary accounts
receivable records.
d. Entity's bank-to compare the listing with the cashier's deposit slip.

9. Which of the following internal control procedures most likely would ensure that all
billed sales are correctly posted to the accounts receivable ledger?
a. Daily sales summaries are compared to daily postings to the accounts
receivable ledger.
b. Each sales invoice is supported by a pre-numbered shipping document.
c. The accounts receivable ledger is reconciled daily to the control account in the
general ledger.
d. Each shipment on credit is supported by a pre-numbered sales invoice.

10. Which one of the following would the auditor consider to be an incompatible
operation if the cashier receives remittances from the mailroom?
a. The cashier prepares the daily deposit.
b. The cashier makes the daily deposit at a local bank.
c. The cashier posts the receipts to the accounts receivable subsidiary ledger
cards.
d. The cashier endorses the checks.

11. For effective internal control, the billing function should be performed by the
a. Accounting Department.
b. Sales Department.
c. Shipping Department.
d. Credit and Collection Department.
12. Which of the following sets of duties would ordinarily be considered basically
incompatible in terms of good internal control?
a. Preparation of monthly statements to customers and maintenance of the
accounts receivable subsidiary ledger.
b. Posting to the general ledger and approval of additions and terminations relating
to the payroll.
c. Custody of unmailed signed checks and maintenance of expense subsidiary
ledgers.
d. Collection of receipts on account and maintaining accounts receivable
records.

Purchases and Disbursements Cycle

13. An important purpose of the auditor's review of the client's procurement system
should be to determine the effectiveness of the procedures to protect against
a. Improper materials handling.
b. Unauthorized persons issuing purchase orders.
c. Mispostings of purchase returns.
d. Excessive shrinkage or spoilage.

14. With respect to a small company's system of purchasing supplies, an auditor's

primary concern should be to obtain satisfaction that supplies ordered and paid for
have been
a. Requested and approved by authorized individuals who have no incompatible
duties.
b. Received, counted, and checked to quantities and amounts on purchase
orders and invoices.
c. Properly recorded as assets and systematically amortized over the estimated
useful life of the supplies.
 d. Used in the course of business and solely for business purposes during the year
under audit.

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

16. The accounts payable department receives the purchase order form to accomplish
all of the following except
a. Compare invoice price to purchase order price.
b. Ensure the purchase had been properly authorized.
c. Ensure the goods had been received by the party requesting the goods.
d. Compare quantity ordered to quantity purchased.

17. A client erroneously recorded a large purchase twice. Which of the following internal
control measures would be most likely to detect this error in a timely and efficient
manner?
a. Footing the-purchases journal.
b. Reconciling vendors' monthly statements with subsidiary payable ledger
accounts.
c. Tracing totals from the purchases journal to the ledger accounts.
d. Sending written quarterly confirmations to all vendors.

18. As an in-charge auditor you are reviewing a summary of control weaknesses in cash
disbursement procedures. Which one of the following weaknesses, standing alone,
should cause you the least concern?
 a. Checks are signed by only one person.
b. Signed checks are distributed by the controller to approved payees.
c. Treasurer fails to establish bona fides of names and addresses of check payees.
d. Cash disbursements are made directly out of cash receipts.
19. Which of the following is an internal control that would prevent a paid disbursement
voucher from being presented for payment a second time?
a. Vouchers should be prepared by individuals who are responsible for signing
disbursement checks.
b. Disbursement vouchers should be approved by at least two responsible
management officials.
c. The date on a disbursement voucher should be within a few days of the date the
voucher is presented for payment.
d. The official signing the check should compare the check with the voucher
and should deface the voucher documents.

20. 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.

21. An auditor compares information on canceled checks with information contained in

the cash disbursement journal. The objective of this test is to determine that
a. Recorded cash disbursement transactions are properly authorized.
 b. Proper cash purchase discounts have been recorded.
c. Cash disbursements are for goods and services actually received.
d. No discrepancies exist between the data on the checks and the data in the
journal.

22. Operating control over the check signature plate normally should be the
responsibility of the
a. Secretary.
b. Chief accountant.
c. Vice president of finance.
d. Treasurer.

Payroll Transaction Cycle

23. It would be appropriate for the payroll accounting department to be responsible for
which of the following functions?
a. Approval of employee time records.
b. Maintenance of records of employment, discharges, and pay increases.
c. Preparation of periodic governmental reports as to employees' earnings
and withholding taxes.
d. Distribution of pay checks to employees.

24. Which of the following procedures would normally be performed by the auditor when
making tests of payroll transactions?
a. Interview employees selected in a statistical sample of payroll transactions.
b. Trace number of hours worked as shown on payroll to time cards and time
reports signed by the foreman.
c. Confirm amounts withheld from employees’ salaries with proper governmental
authorities.
d. Examine signatures on paid salary checks.
25. Effective internal control over unclaimed payroll checks that are kept by the Treasury
Department would include Accounting Department procedures that require
a. Effective cancellation and stop payment orders for checks representing
unclaimed wages.
b. Preparation of a list of unclaimed wages on a periodic basis.
c. Accounting for all unclaimed wages in-a current liability account.
d. Periodic accounting for the actual checks representing unclaimed wages.

26. Which of the following is an effective internal control used to prove that production
department employees are properly validating payroll timecards at a time-recording
station?
a. Timecards should be carefully inspected by those persons who distribute pay
envelopes to the employees.
b. One person should be responsible for maintaining records of employee time for
which salary payment is not to be made.
c. Daily reports showing time charged to jobs should be approved by the
foreman and compared to the total hours worked on the employee
timecards.
d. Internal auditors should make observations of distribution of paychecks on a
surprise basis.

27. Effective internal control over the payroll function would include which of the
following?
a. Total time recorded on time-clock punch cards should be reconciled to job
reports by employees responsible for those specific jobs.
b. Payroll Department employees should be supervised by the management of the
Personnel Department.
c. Payroll Department employees should be responsible for* maintaining employee
personnel records.
 d. Total time spent on jobs should be compared with total time indicated on
time-clock punch cards.

28. To minimize the opportunities for fraud, unclaimed cash payroll should be
a. in a safe deposit box.
b. Held by the payroll custodian.
c. Deposited in a special bank account.
d. Held by the controller.

29. A large retail enterprise has established a policy which requires that the paymaster
deliver all unclaimed payroll checks to the Internal Auditing. Department at the- end
of each payroll distribution day. This policy was most likely adopted in order to
a. Assure that employees who were absent on a payroll distribution day are not
paid for that day.
b. Prevent the paymaster from cashing checks which are unclaimed for several
weeks.
c. Prevent a bona fide employee's check from being claimed by another employee.
d. Detect any fictitious employee who may have been placed on the payroll.

30. In the weekly computer run to prepare payroll checks, a check was printed for an
employee who had been terminated the previous week. Which of the following
controls, if properly utilized, would have been most effective in preventing the error
or ensuring its prompt detection?
a. A control total for hours worked, prepared from time cards collected by the
Timekeeping Department.
b. Requiring the treasurer's office to account for the numbers of the pre-numbered
checks issued to the EDP department for the processing of the payroll.
c. Use of a check digit for employee numbers.
d. Use of a header label for the payroll input sheet.
31. The proper use of pre-numbered termination notice forms by the Payroll Department
should provide assurance that all
a. Uncashed payroll checks were issued to employees who have not been
terminated.
b. Personnel files are kept up to date.
c. Employees who have not been terminated receive their payroll checks.
d. Terminated employees are removed from the payroll.

32. When examining payroll transactions, an auditor is primarily concerned with the
possibility of
a. Overpayments and unauthorized payments.
b. Posting of gross payroll amounts to incorrect salary expense accounts.
c. Misfootings of-employee time records.
d. Excess withholding of amounts required to be withheld.

Production and Conversion Cycle

33. If preparation of a periodic scrap report is essential in order to maintain adequate
control over the manufacturing process, the data for this report should be
accumulated in the
a. Accounting Department.
b. Production Department.
c. Warehousing Department.
d. Budget Department.

34. When perpetual inventory records are maintained in quantities and in dollars, and
internal accounting control over inventory is weak, the auditor would probably
a. Want the client to schedule the physical inventory count at the end of the
year.
b. Insist that the client perform physical counts of inventory items several times
during the year.
c. Increase the extent of tests for unrecorded liabilities at the end of the year.
 d. Have to disclaim an opinion on the income statement for that year.

35. An inventory turnover analysis is useful to the auditor because it may detect
a. Inadequacies in inventory pricing.
b. Methods of avoiding cyclical holding costs.
c. The optimum automatic reorder points.
d. The existence of obsolete merchandise.

36. When an auditor tests a client's cost accounting system, the auditor's tests are
primarily designed to determine that
a. Quantities on hand have been computed based on acceptable. cost accounting
techniques that reasonably approximate actual quantities on hand.
b. Physical inventories are in substantial agreement with book inventories.
c. The system is in accordance with generally accepted accounting principles and is
functioning as planned.
d. Costs have been properly assigned to finished goods, work in process, and
cost of goods sold.

Investing and Financing Transactions Cycle

37. In verifying the amount of goodwill recorded by a client, the most convincing
evidence which an auditor can obtain is by comparing the recorded value of assets
acquired with the
a. Assessed value as evidenced by tax bills.
b. Seller's book value as evidenced by financial statements.
c. Insured value as evidenced by insurance policies.
d. Appraised value as evidenced by independent appraisals.

38. The, auditor interviews the" plant manager. The auditor is most likely to rely upon
this interview as primary support for an audit conclusion on
a. Capitalization vs. expensing policy.
b. Allocation of fixed and variable costs.
 c. The necessity to record a provision for deferred maintenance costs.
d. The adequacy of the depreciation expense.

39. To achieve effective internal control over fixed asset additions, a company should
establish procedures that require
a. Capitalization of the cost of fixed asset additions in excess of specific dollar
amount.
b. Performance of recurring fixed asset maintenance work solely by maintenance
department employees.
c. Classification as investments, those fixed asset additions that are not used in the
business.
d. Authorization and approval of major fixed asset additions.

40. Which of the following policies is an internal control weakness related to the
acquisition of factory equipment?
a. Acquisitions are to be made through and approved by the department in
need of the equipment.
b. Advance executive approvals are required for equipment acquisitions.
c. Variances between authorized equipment expenditures and actual costs are to
be' immediately reported to management.
d. Depreciation policies are reviewed only once a year.

41. Which of the following is the most important internal control procedure over •
acquisitions of property, plant, and equipment?
a. Establishing a written company policy distinguishing between capital and
revenue expenditures.
b. Using a budget to forecast and control acquisitions and retirements.
c. Analyzing monthly variances between authorized expenditures and actual costs.
d. Requiring acquisitions to be made by user departments.

42. Which of the following is an internal control weakness related to factory equipment?
 a. A policy exists requiring all purchases of factory equipment to be made by
the department in need of the equipment.
b. Checks issued in payment of purchases of equipment are not signed by the
controller.
c. Factory equipment replacements are generally made when estimated useful
lives, as indicated in depreciation schedules, have expired.
d. Proceeds from sales of fully depreciated equipment are credited to other income.

43. Which of the following is an internal control weakness related to factory equipment?
a. Checks issued in payment of purchases of equipment are not signed by the
controller.
b. All purchases of factory equipment are required to be made by the
department are required to be made by the department in need of the
equipment.
c. Factory equipment replacements are generally made when estimated useful
lives, as indicated in depreciation schedules, have expired.
d. Proceeds from sales of fully depreciated equipment are credited to other income.

44. With respect to an internal control measure that will assure accountability for fixed
asset retirements, management should implement a system that includes
a. Continuous analysis of miscellaneous revenue to locate any cash proceeds from
sale of plant assets.
b. Periodic inquiry of plant executives by internal auditors as to whether any plant
assets have been retired.
c. Continuous utilization of serially numbered retirement work orders.
d. Periodic observation of plant assets by the internal auditors.

45. To improve accountability for fixed asset retirements, management most likely would
implement a system of internal control that includes
a. Continuous analysis of the repairs and maintenance account.
 b. Periodic inquiry of plant executives by internal auditors as to whether any plant
assets have been retired.
c. Continuous utilization of serially numbered retirement work orders.
d. Periodic inspection of insurance policies by the internal auditors.

Others
46. In a properly designed internal control system, the same employee may be permitted
to
a. Receive and deposit checks, and also approve write-offs of customer accounts.
b. Approve vouchers for payment, and also sign checks.
c. Reconcile the bank statements, and also receive and deposit cash.
d. Sign checks, and also cancel supporting documents.

47. Proper segregation of functional responsibilities in an effective system of internal

accounting control calls for separation of the functions of
a. Authorization, execution, and payment.
b. Authorization, recording, and custody.
c. Custody, execution, and reporting.
d. Authorization, payment, and recording.

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

49. Evidential matter concerning proper segregation of duties ordinarily is best obtained
by
a. Preparation of a flowchart of duties performed by available personnel.
 b. Inquiring whether control procedures operated consistently throughout the
period.
c. Reviewing job descriptions prepared by the Personnel Department.
d. Direct personal observation of the employees who apply control
procedures.

50. Which of the following audit tests would be regarded as a test of controls?
a. Tests of the specific items making up the balance in a given general ledger
account.
b. Tests of the inventory pricing to vendors' invoices.
c. Tests of the signatures on canceled checks to board of director's
authorizations.
d. Tests of the additions to property, plant, and equipment by physical inspections.

51. After the auditor has prepared a flowchart of the internal accounting controls
surrounding sales and evaluated the design of the system, the auditor would perform
tests of controls on all control procedures
a. Documented in the flowchart.
b. Considered to be weaknesses that might allow errors to enter the accounting
system.
c. That the auditor plans to rely on.
d. That would aid in preventing irregularities.

52. Which of the following would be least likely to suggest to an auditor that the client's
management may have overridden the internal control system?
a. Differences are always disclosed on a computer exception report.
b. Management does not correct internal control weaknesses that it knows about.
c. There have been two new controllers this year.
d. There are numerous delays in preparing timely internal financial reports.
53. The normal sequence of documents and operations on a well-prepared systems
flowchart is
a. Top to bottom and left to right.
b. Bottom to top and left to right.
c. Top to bottom and right to left.
d. Bottom to top and right to left.

54. When preparing a record of a client's system of internal control, the independent
auditor sometimes uses a system flowchart, which can best be described as a
a. Pictorial presentation of the flow of instructions in a client's internal computer
system.
b. Diagram which clearly indicates an organization's internal reporting structure.
c. Graphic illustration of the flow of operations which is used to replace the auditor's
internal control questionnaire.
d. Symbolic representation of a system or series of sequential processes.

FIRST DRILL - AUDITING THEORY

1. Which of the following is more difficult to evaluate objectively?

A. Presentation of financial statements in accordance with generally accepted
accounting principles
B. Compliance with government regulations
C. Efficiency and effectiveness of operations
D. All three of the above are equally difficult

2. Which is the primary objective of the independent auditor in auditing the financial
statements?
A. To express an opinion on the financial viability of the client
B. To express a conclusion as to the accuracy of balances of client GL accounts
C. To express an opinion on the fairness of the financial statements
D. To satisfy government requirements

3. The person(s) or organization(s) with responsibility for overseeing the strategic

direction of the entity and obligations related to the accountability of the entity. This
include overseeing the financial reporting process
A. Management
 B. Senior management
C. Those charged with governance
D. Executive directors

4. Which of the following best describes the reason why an independent auditor reports
on the financial statements?
A. Only independent auditors can detect management fraud
B. Internal controls over the financial reporting process (ICFR) may be lacking
hence, independent auditors must perform test of controls to determine the
effectiveness of ICFR
C. With having the financial statements audited, government regulators will not
accept corporate filings.
D. Differentiate interest may exist between management preparing the
financial statements and the persons or entities who will use those
statements

5. It is a difference between the amount, classification, presentation, or disclosure of a

reported financial statement item and the amount, classification, presentation, or
disclosure that is required for the item to be in accordance with the application
financial reporting framework.
A. Error
B. Fraud
C. Misstatement
D. Any one of the above

6. The independent audit of the financial statements cannot provide absolute

assurance. This is because of the inherent limitations of the audit. Which is not one
of the inherent limitations of an audit?
A. Use of selecting testing
B. Nature of audit evidence which is persuasive rather than conclusive
C. Inherent limitations of the client’s accounting and internal control systems
D. Inability to perform the audit using risk-based approach

7. Which of the following factors most likely would cause a CPA to not accept a new
audit engagement?
A. The prospective client has fired its prior auditor
B. The CPS lacks a thorough understanding of the prospective client’s operations
and industry
C. The CPA is unable to review the predecessor auditor’s working papers
D. The prospective client is unwilling to make financial records available to
the CPA

8. If permission from client to discuss its affairs with the proposed auditor is denied by
the client, the predecessor auditor should:
A. Keep silent of the denial
B. Disclose the fact that the permission to disclose is denied by the client
 C. Disclose adequately to proposed auditor all noncompliance made by the
client.
D. Seek legal advice before responding to the proposed auditor

9. The audit engagement letter sets forth all of the following, except:
A. The fact that in spite of the inherent limitations of the accounting and
internal control systems the client entity may fail to identify and correct
material misstatements in the financial statements
B. The objectives of the audit of the financial statements which is to express an
opinion on their fairness
C. The responsibility of management to allow the auditor to have unrestricted
access to client records, documentation and other information
D. The fact that because of the inherent limitations of the audit, there is an
unavoidable risk that material misstatements may remain undiscovered.

10. Before accepting an audit engagement, a successor auditor should make specific
inquiries of the predecessor auditor regarding the predecessor’s:
A. Awareness of the consistency the application of generally accepted accounting
principles between accounting periods.
B. Evaluation of all matters of continuing accounting significance
C. Opinion of any subsequent events occurring since the predecessor’s audit report
was issued
D. Understanding as to the reason for the change of auditors

11. Analytical procedures, which means the analysis of significant ratios and trends
including the resulting investigation of fluctuations and relationships that are
inconsistent with other relevant information or which deviate from predicted
amounts, are not required to be applied
A. At the planning stage of the audit
B. As substantive procedures
C. Overall review stage of the audit
D. None of the above

12. Inherent risk and control risk differ from detection risk in that inherent risk and control
risk are
A. Elements of audit risk while detection risk is not
B. Changed at the auditor’s discretion while detection risk is not
C. Considered at the individual account-balance level while detection risk is not.
D. Functions of the client and its environment while detection risk is not

13. The auditor’s understanding of the entity and its environment consists of an
understanding of the following aspects:
I. Industry, regulatory, and other external factors, including the applicable
financial reporting
II. Nature of the entity, including the entity’s selection and application of
accounting policies
 III. Objectives and strategies and the related business risks that may result in a
material misstatement of the financial statements.
IV. Measurement and review of the entity’s financial performance
V. Internal control
A. All of the above
B. I, II and III
C. I, II, III and IV
D. I, II, III and V

14. Which statement is correct regarding business risks?

A. The risk of material misstatement of the financial statements is broader than
business risk, through it includes the latter
B. The auditor should identify or assesses all business risks
C. All business risks give rise to risks of material misstatement
D. A business risk may have an immediate consequence for the risk of
misstatement for classes or transactions, account balances, and
disclosures at the assertion level of the financial statements as a whole.

15. According to PSA 315, Performance measures, whether external or internal, create
pressures on the entity. These pressures, in turn, may motivate management to take
action to
A. Improve the business performance or to misstate the financial statements
B. Do their best in discharging their managerial functions
C. Act in an honest manner with regards financial reporting
D. All of the above

Items 16 to 22:
Audit Case: you are in the risk assessment phase of your audit. Your client, Fraud-O
Corporation, manufactures products which are extremely small, yet commends a high
price in the market. It is in the process of stock listings in the stock exchange. However,
recent developments in the industry indicate product saturation in late 2014 up to the
year under audit (2-015) due to a high degree of completion. Because of this, in June
2015, Client management initially expected a decline in revenues and operating
margins.

You have known that the basis for determining management compensation and
bonuses is the achievement of a 40% increase in revenues. The 2015 financial
statements were completed by the client in January 2016. Using analytical procedures,
you noted that said performance target was met by the company. However, you noted a
large negative net operating cash inflow in the statement of cash inflows.

Based on the above case, answer the following questions:

16. Which of the following is a fraud risk factor relating to misappropriation of assets?
A. Inability to generate positive operating cash inflows
B. Decline in operating margins
C. Inventory items that are small in size but of high value
 D. None, all of the fraud risk factors in the company are related to fraudulent
financial reporting

17. Identify a fraud risk factor for Fraud-O Corporation relating to fraudulent financial
reporting
A. Large amounts of cash processed
B. Inventory items that are small in size but of high value
C. Poor managerial ability to counter the effect of high degree of completion in the
industry
D. High degree of competition or market saturation accompanied by declining
margins

18. After a fraud risk factor, which of the following would be the next logical step in risk
assessment?
A. Determine the type of audit procedures to be performed
B. Assess the fraud risk factor as to its magnitude and probability of
occurrence
C. Determine the control risk
D. Formulate the appropriate responses to the assessed risks

19. The answer for No. 18 is closely related to which of the elements of the fraud
triangle?
A. Opportunities to commit fraud
B. Pressures or incentives to commit fraud
C. Rationalizations
D. Capability to commit fraud

20. If internal control over the recording of revenues is ineffective, what type of
substantive procedures would you perform?
A. More detailed
B. Less detailed
C. Interim
D. Less effective

21. Which of the following is correct about internal control?

A. Accounting and internal control systems provide management with conclusive
evidence that objectives are reached
B. One of the inherent limitations of accounting and internal control systems
is the possibility that the procedures may become inadequate due to
changes in conditions, and compliance with procedures may deteriorate
C. Most internal controls tend to be directed at non-routing transactions
D. Management does not consider costs of the accounting and internal control
systems.

22. Effective internal control

A. Eliminates risk and potential loss to the organization
 B. Cannot be circumvented by management
C. Is unaffected by changing circumstances and conditions encountered by the
organization
D. Reduces the need for management to review exception reports on a day-to-
day basis.

23. In an audit of financial statements, an auditor’s primary consideration regarding a

control is whether it
A. Reflects management’s philosophy and operating style.
B. Affects management’s financial statement assertions.
C. Provides adequate safeguards over access to assets.
D. Enhances management’s decision-making process.

24. Which statement is incorrect regarding the nature of tests of controls?

A. As the planned level assurance increases, the auditor seeks more reliable audit
evidence
B. Those controls subject to testing by performing inquiry combined with inspection
or re-performance ordinarily provide more assurance than those controls for
which the audit evidence consists solely of inquiry and observation.
C. The absence of misstatements detected by substantive procedure provides
audit evidence that controls related to the assertion being tested are
effective
D. A material misstatement detected by the auditor’s procedures that was not
identified by the entity ordinarily is indicative of the existence of a material
weakness in internal control

25. An auditor is least likely to tests controls that provide for

A. Classification of revenue and expense transactions by product line
B. Approval of the purchase and sale of trading securities
C. Segregation of the functions of recording disbursements and reconciling the bank
account
D. Comparison of receiving reports and vendors invoices with purchase orders

Bonus

26. Tests of controls may include the following, except:

A. Reperformance of internal control procedures
B. Inquiries about, and observation of, internal controls which leave no audit trail
C. Inspection of documentary support for transactions evidencing authorization
D. Analytical procedures involving comparison of operating expense with
budgeted amount

27. This is a deficiency or a combination of deficiencies in internal control that, in the

auditor’s judgment, is of sufficient importance to merit the attention of those charged
with governance.
A. Significant deficiency
 B. Deficiency in internal control
C. Significant risk
D. Reportable matter

28. Which of the following departments most likely would approve changes in pay rates
and deductions from employee salaries?
A. Personnel
B. Treasurer
C. Controller
D. Payroll

29. Sound internal control dictates that defective merchandise returned by customers
should be presented initially to the
A. Salesclerk
B. Purchasing clerk
C. receiving clerk
D. inventory control clerk
30. Which of the following controls would an entity most likely use to assist in satisfying
the completeness assertion related to long-term investments?
A. Senior management verifies that securities in the bank safe-deposit are
registered in the entity’s name.
B. The internal auditor compares the securities in the bank safe-deposit box
with recorded investments
C. The treasurer vouches the acquisition of securities by comparing brokers’
advices with canceled checks
D. The controller compares the current market prices of recorded investments with
the brokers’ advices on file

31. Which of the following is a substantive test that an auditor most likely would perform
to verify the existence and valuation of recorded accounts payable?
A. Investigating the open purchases order file to ascertain the pre-numbered
purchases orders are used and accounted for
B. Receiving the client’s mail, unopened, for a reasonable period of time after the
year-end to search unrecorded vendors’ invoices.
C. Vouching selected entries in the accounts payable subsidiary ledger to
purchase orders and receiving reports.
D. Confirming accounts payable balances with known suppliers who have zero
balances.

32. Cash receipts should be deposited on the day of receipt or the following business
day. Select the most appropriate audit procedure to determine that cash is promptly
deposited.
A. Review the functions of cash receiving and disbursing for proper separation of
duties
B. Review cash register tapes prepared for each sale.
 C. Review the functions of cash handling and maintaining accounting records for
proper separation of duties
D. Compare the daily cash receipts totals with the bank deposits

33. Which of the following procedures would an auditor most likely perform for year-end
accounts receivable confirmations when the auditor did not receive replies to second
requests?
A. Review the cash receipts journal for the month prior to the year-end
B. Intensify the stud of internal control concerning the revenue cycle
C. Increase the assessed level of detection risk for the existence assertion
D. Inspect the shipping record documenting the merchandise sold to the
debtors

34. As the acceptable level of detection risk decreases, the assurance directly provides
from
A. Substantive tests should increase
B. Substantive tests should decrease
C. Test of controls should increase
D. Test of controls should decrease

35. The major reason an independent auditor gathers evidence is to

A. Detect management fraud
B. Evaluate internal control
C. Avoid lawsuits from statement users
D. From an opinion on the financial statements

36. Which of the following is true concerning the reliability of audit evidence?
A. The reliability of audit evidence is increased when it is obtained from independent
sources within and outside the entity
B. The reliability of audit evidence that is generated internally is increased when the
related controls, including those over its preparation and maintenance, imposed
by the entity are efficient
C. Audit evidence obtained directly by the auditors is more reliable than audit
evidence obtained from the indirectly or by inference
D. Audit evidence in documentary from, whether paper, electronic, or other medium,
is less reliable than evidence obtained orally.

37. Which of the following tests of controls most likely would help assure an auditor that
goods shipped are properly billed?
A. Scan the sales journal for sequential unusual entries
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable to daily sale summaries
D. Inspect unused sales invoices for consecutive pre-numbering.

38. Which of the following procedures would an auditor most likely perform in searching
for unrecorded liabilities?
 A. Trace a sample of accounts payable entries recorded just before year-end to the
unmatched receiving report file
B. Compare a sample of purchase orders issued just after year-end with the year-
end accounts payable trial balance
C. Vouch a sample of cash disbursements recorded just after year-end to
receiving reports and vendor invoices
D. Scan the cash disbursements entries recorded just before year-end for
indications of unusual transactions

39. Which of the following is an audit procedures that is designed to verify the valuation
assertion?
A. Analyzing inventory in transit bought on FOB Shipping Point terms to find out if
they have been included in ending inventory
B. Vouching the recorded transaction to source documents
C. Reviewing the aging of accounts receivable
D. All of the above

40. Which of the following is not one of the auditor’s primary objectives in an audit of
trading securities?
A. To determine whether the securities actually exist
B. To determine whether the securities are the property of the client
C. To determine whether the securities are properly classified on the statement of
financial position
D. To determine whether the securities are authentic

41. In testing the completeness assertion for inventories, an auditor works from the
A. Recorded inventories to physical count results
B. Result of the observation of physical count and test counts to the recorded
inventories
C. Cost of sales to the inventories
D. General ledger to the journal entry to set up the ending inventories

42. The objective of tests of details of transactions performed as substantive tests is to

A. Comply with generally accepted auditing standards
B. Attain assurance about the reliability of the accounting system
C. Detect material misstatements in the financial statements
D. Evaluate whether management’s policies and procedure operated effectively

43. While observing a client’s annual physical inventory, an auditor recorded test counts
for several items and noticed that certain test counts were higher than the recorded
quantities in the client’s perpetual records. This situation could be the result of the
client’s failure to record
A. Purchased discounts
B. Purchase returns
C. Sales
D. Sales returns
44. A disadvantage of auditing around the computer is that it
A. Permits no direct assessment of accrual processing
B. Requires highly skilled auditors
C. Interacts actively with audited applications
D. Demands intensive use of machine resources

45. An auditor most likely would introduce test data into a computerized payroll systems
to test internal controls related to the
A. Existence of unclaimed payroll checks held by supervisors
B. Early cashing of payroll checks by employees
C. Discovery of invalid employee ID numbers
D. Proper approval of overtime by supervisors
46. It is security control tat verifies a person’s identify through matching certain unique
physical attributes such as, but not limited to, fingerprints, voice, and eye or retina
profile
A. Bundy clock
B. Biometrics
C. Access control
D. Hash total

47. An auditor concludes that there is substantial doubt about an entity’s ability to
continue as a going concern for a reasonable period of time. If the entity’s financial
statements adequately disclose these financial difficulties, the auditor’s report is
required to include an explanatory paragraph that specifically mentions
Management Plans Going Concern
A. Yes Yes
B. No Yes
C. Yes No
D. No No

48. A procedure that most likely would assist an auditor in identifying condition and
events that may indicate substantial doubt about an entity’s ability to continue as a
going concern
A. Inspecting title documents to verify whether any assets are pledged as collateral
B. Confirming with third parties the details of arrangements to maintain
financial support
C. Reconciling the cash balance per books with the cutoff bank statement and the
bank confirmation
D. Comparing the entity’s depreciation and asset capitalization policies to other
entities in the industry

49. Which of the following subsequent events will least likely result to an adjustment on
the financial statements?
A. Material changes in the settlement of liabilities which were estimated as of the
balance sheet date
 B. Culmination of events affecting the realization of inventories owned as of the
balance sheet date
C. Material changes in the quoted process of listed investment securities after
the balance sheet date
D. Culmination of events affecting the realizable value of accounts receivable
owned as of the balance sheet date

50. The adverse effects causing an auditor to believe there is a 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 operation 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

51. Which of the following procedures should an auditor generally perform regarding
subsequent events?
A. Compare the latest available interim financial statements with the financial
statement being audited
B. Send second requests to the client’s customers who failed to respond to initial
accounts receivable confirmation requests
C. Communicate material weaknesses in internal control to the client’s audit
committee
D. Review the cutoff bank statements for several months after the year-end

52. An auditor is considering whether the omission of a substantive procedure

considered necessary at the time of an audit may impair the auditor’s present ability
to support the previously expressed opinion. The auditor need not apply the omitted
procedure if the
A. Financial statements and auditor’s report were not distributed beyond
management and the board of directors
B. Auditor’s previously expressed opinion was qualified because of a departure from
GAAP
C. Result of other procedures that were applied ten to compensate for the
procedure omitted
D. Omission is due to unreasonable delays by client personnel ion providing data on
a timely basis

53. Management’s refusal to furnish a written representation letter on a matter, which

the auditor considers essential, constitutes
A. Prima facie evidence that the financial statements are not presented fairly
B. A noncompliance of the client entity contrary against corporate laws
C. An uncertain sufficient to preclude an unqualified opinion
D. A scope limitation sufficient to preclude an unqualified opinion

54. Completing the audit procedures are

 A. Optional
B. Mandatory only if control risk is high
C. Mandatory
D. Mandatory only if both inherent and control risk is high

55. Which of the following is a fraudulent act?

A. Mistake in the application of PFRS
B. Incorrect accounting estimate due to management’s misinterpretation of facts
C. Recording transactions that have no commercial substance in order to
achieve certain financial results
D. Mistake in gathering and processing data from which financial statements are
prepared

56. The risk of not detecting a material misstatement resulting from fraud is higher than
the risk of not detecting one resulting from error. This is because fraud
A. May involve sophisticated and carefully organized schemes designed to
conceal it
B. Ordinarily results to material misstatement while error does not
C. Cannot be detected simply by conducting independent audits of the financial
statements, but can be detected through the deployment of forensic investigators
D. Is always perpetrated by management while error is committed by entity
employees.

57. All of the following are fraud risk factors relating to misappropriation of assets. Which
is not?
A. Large amounts of cash on hand or processed
B. Inventory items that are small in size, of high value, or high in demand
C. Marginal ability to meet exchange listing requirements or debt repayment
or other debt covenant requirements
D. Inadequate physical safeguards over cash, investments, inventory or fixed assets

58. Which of the following is most likely to be presumed to represent fraud risk on an
audit of the financial statements?
A. Tax fraud
B. Improper recording pf retained earnings
C. Improper revenue recognition
D. Payroll fraud

59. Which of the following characteristics most likely would heighten an auditor’s
concern about the risk of intentional manipulation of financial statements?
A. Rate of change in the entity’s industry is low
B. Turnover of senior accounting personnel is low
C. Turnover of rank-and-file maintenance personnel is high
D. Management places substantial emphasis on meeting earnings projections

60. What is non-compliance?

A. Acts committed by the entity, either intention or unintentional, which are contrary
to the prevailing laws or regulations.
B. Acts of omission or commission by the entity which are essentially intentional and
are contrary to the prevailing laws or regulations
C. Acts of omission or commission by the entity, either intentional or
unintentional which are contrary to the prevailing laws or regulations.
D. Acts of omission or commission by the entity, either intentional or unintentional
which are contrary to the prevailing and applicable financial reporting framework.