PHILIPPINE ACCOUNTANCY ACT OF 2004 (RA9298)

1. The Professional Regulatory Board of Accountancy shall be composed of a chairman and

(LIST A) members to be appointed by the President of the Phils. 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
Answer: d

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
Answer: c

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. d. The Board shall elect a vice- chairman from among its members to serve for a term of three
years.
Answer: d
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
Answer: d

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
Answer: b

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.
Answer: a
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)
Answer: a

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
Answer: a

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

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

a. ACPAPP
b. FINER
c. Commission on Audit
d. Securities and Exchange Commission
Answer: a

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

a. 2 years, renewable c. 3 years, non renewable
b. 4 years, non renewable d. 3 years, renewable
Answer: d

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.
Answer: c

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
Answer: b

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
Answer: b

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.
Answer: d

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 TV c. IV only d. I and IV
Answer: d

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 examinations.
d. The refresher course should be completed within two (2) years from the preceding
examination.
Answer: c
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
Answer: a

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.
Answer: c

20. The Board of Accountancy may issue certificate of registration and 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 for , examination.
Answer: b

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.
Answer: d
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 fame of not more than P50,000
c. An imprisonment for a period not exceeding two years
d. Both b and c.
Answer: 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.
Answer: c

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.
Answer: b

25. Which statement is correct regarding CPF, 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.
Answer: d

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.
Answer: b

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
Answer: a

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.
Answer: d
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.
Answer: d

30: A CPA shall not practice under a full 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.
Answer: d

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. Hermosa'a has ten other partners who are all CPAs)
Answer: c
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
Answer: b

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.
Answer: d

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.
Answer: d

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 r c
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.
Answer: b

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.
Answer: b

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
Answer: c

38 and 39 are based on the following information:

38. 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
Answer: d

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 unsold 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.
Answer: a

40. A CPA whose certificate of registration has been revoked:

a. Can no longer be reinstated.
b. Is automatically reinstated as a CPA by the PRC after two 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.
Answer: d

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 b. Three years c. Four years d. Five years
Answer: b

AUDIT RELATED SERVICES

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
Answer: a

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
Answer: c

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

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

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

a. Taxation c. Management Advisory
b. Consultancy d. Agreed-upon procedures
Answer: d

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

a. Audit c. Review
b. Agreed-upon procedures d. Compilation
Answer: a

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

a. Apply analytical procedures and make inquiries from third 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 responses to inquiries.
d. Obtain understanding of the client's business and industry.
Answer: d

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
Answer: d
8. The objective of an agreed upon-procedures engagement is for the auditor to:
a. Carry out procedures of an audit nature to which the auditor and the entity and any
appropriate third parties have agreed and to report on factual findings.
b. Carry out procedures of a review nature to which the auditor and the entity and any
appropriate third parties have agreed and to report on 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.
Answer: a

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
Answer: d

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 a 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.
Answer: d

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 performed.
Answer: d

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.
Answer: a

13. What level of assurance does an accountant give on a compilation report?

a. None c. Low
b. Moderate d. High
Answer: a

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
Answer: a

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
Answer: c
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
Answer: a

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

18. The use of 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.
Answer: a

19. When an independent CPA is associated with the financial statements of a 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
Answer: c
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
Answer: b

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
Answer: d

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
Answer: b

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. Inquires and analytical procedures
b. Reconciling and reforming d. Confirmation and observation
Answer: c

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
Answer: d

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 of PFRS
Answer: b

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.
b. Inquiries concerning entity's procedures for recording and summarizing transactions
c. Analytical review designed to evaluate the effectiveness of internal control
d. Inquiries from client's lawyers about pending litigation, claims and assessments.
Answer: b

27. In which of the following reports should an accountant not express negative or limited
assurance?
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
Answer: b

OVERVIEW OF AUDITING
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
Answer: c

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
Answer: c

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
Answer: b

4. Most of the independent auditor's work in formulating an opinion on 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
Answer: b

5. An audit that involves obtaining and evaluating evidence about the efficiency and
effectiveness of an entity's operating activities in relation to specified objectives is a(n):
a. internal audit
b. external audit
c. operational audit
d. compliance audit
e. financial statement audit
Answer: c

6. An audit that involves obtaining and evaluating evidence in order to 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
d. compliance audit
e. financial statement audit
Answer: d

7. In financial statement audits, the ludit—proce; should conform with

a. Philippine Standards on Auditing c. The audit program
b. Financial reporting standards d. The auditor's judgment.
Answer: a

8. Which of the following has the primary responsibility for the fairness of the representations
made in the financial statements?
a. client's management c. Audit committee
b. Independent auditor d. Financial statements

9. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter. c. Audit report.
b. Management letter. d. Financial statements
Answer: c

10. Which. of the following types of audit uses as its criteria laws and regulations?
a. Operational audit c. Compliance audit
b. Financial statement audit d. Performance audit
Answer: c

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 a 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.
Answer: c

12. Which of the following types of auditing is performed most commonly by CPA's on a
contractual basis?
a. Internal auditing c. Income tax auditing
b. Government auditing d. External auditing
Answer: d
13. The primary purpose of an independent financial statement audit is to
a. 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
Answer: d

14. Independent auditing can best be described as a

a. subset of accounting
b. professional activity data 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
Answer: b

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
Answer: a

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.
Answer: c
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
Answer: b

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
Answer: d

19. In general, internal auditors' independence will be greatest when they report directly to 'the:
a. vice-president for finance
b. corporate controller
c. audit committee of the board of directors
d. corporate stockholders
Answer: c

20. The independent audit is important to readers of financial statement because it

a. Determine the future stewardship of the management of the company whose financial
statements are audited.
b. Measures and communicates financial and business data involved in financial statements.
c. the objective examination of and reporting on management prepared statements.
d. Reports on the accuracy of 'all information in the , financial statements.
Answer: c
21. The primary reason for an audit by ;n 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.
Answer: c

22. Which one of the following is not among the conditions that give rise to a 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
e. consequence for making decisions
Answer: c

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 Mternal control system may be in existence.
Answer: b

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 can result in biased information.
b. Information can have substantial economic consequences for a decision-maker.
c. Expertise is often required for information preparation and verification
d. Users can directly assess the quality of information.
Answer: d

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.
Answer: d

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
Answer: c

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
Answer: c
28. The form of assurance issued when auditing financial statements
a. High
b. Negative
c. positive
d. Reasonable
Answer: c

29. The auditor's satisfaction as to the reliability of as assertion being made by one party is
called:
a. Assurance
b. Audit risk
c. Precision
d. Materiality level
Answer: a

30. Which of the following is not one of the reasons why absolute assurance can not 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 can not be audited.
Answer: d

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
Answer: d
32. Which of the following is incorrect about responsibility (or 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 educe management's responsibility
d. Fair presentation of financial statements is an implicit part of the auditor's responsibility.
Answer: c

PRE-ENGAGEMENT
1. Which of the following is the correct order of steps in the audit process?
A. Obtain understanding of the client's internal control
B. Perform tests of control
C. Obtain understanding of the client's business and its environment
D. Draft an audit report
E. Prepare a management letter
F. Prepare engagement letter G. Perform substantive tests
a. F, C, A, B, G, E, D
b. F,A,C,B,G,E,D
c. F, A, C, B, G, E, D
d. F, C, A, B, G, D, E
Answer: d

2. In making a decision to accept or continue with a client, the auditor should consider:
abcd
Its competence YES YES YES YES
Its own independence YES NO YES NO
Its ability to service the client properly YES YES YES NO
The integrity of the client's management YES YES NO YES
Answer: a
3. Which of the following is not one of the reasons why auditor should perform preliminary
engagement activities?
a. To ensure that the auditor maintains the necessary independence and ability to perform the
engagement.
b. To help ensure that there are no issues with management integrity that may affect the auditor's
willingness to continue the engagement.
c. To ensure that 'there is no misunderstanding with the client as to the terms of the engagement.
d. To ensure that sufficient appropriate evidence will be obtained to support the auditor's
Opinion on the financial statements.
Answer: d

4. An auditor who accepts an audit engagement and does not possess the industry expertise of
the business entity should
a. Engage financial experts familiar with nature of the business entity
b. Obtain knowledge of matters that relate to the nature of the entity's business
c. Refer a substantial portion of the audit to another CPA who will act as the principal auditor
d. Inform the client that an unqualified opinion can not be expressed.
Answer: b

5. Preliminary knowledge about the client's business and industry must be obtained prior to the
acceptance of the engagement primarily to
a. Determine the degree of knowledge and expertise required by the engagement.
b. Determine the integrity of management.
c. Determine whether the firm is independent of the client.
d. Gather evidence about the fairness of the financial statements.
Answer: a

6. Which of the following factors most likely would cause an auditor not to accept a new audit
engagement?
a. An inadequate understanding of the entity's interval control structure
b. The close proximity to the end of the entity's fiscal year
c. Concluding that the entity's management probably lacks integrity
d. An inability to perform preliminary analytical procedures before assessing control risk
Answer: c

7. Which of the following factors most likely would influence an auditor's determination of the
auditability of the entity's financial statements?
a. The complexity of the accounting system
b. The existence of related party transactions
c. The adequacy of the accounting records
d. The operating effectiveness of control procedures
Answer: c

8. Which of the following is not normally performed in the preplanning or pre-engagement

phase?
a. Deciding whether to accept or reject an audit engagement
b. Inquiring from predecessor auditor
c. Preparing an engagement letter
d. Obtaining management representation letter
Answer: d

9. The primary purpose of establishing quality control policies and procedures for deciding
whether to accept a new client is to
a. Enable the CPA firm to attest to the reliability of the client.
b. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.
c. Minimize the likelihood of association with clients whose management lacks integrity.
d. Anticipate before performing any field work whether an unqualified opinion can be
expressed.
Answer: c
10. A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit
client would most likely include
a. Inquiry of management as to whether disagreements between the predecessor auditor and the
prospective client were resolved satisfactorily.
b. Consideration of whether sufficient competent evidential matter may be obtained to afford a
reasonable basis for an opinion.
c. Inquiry of third parties, such as the prospective client's bankers and attorneys about
information regarding the prospective client and its management.
d. Consideration of whether the internal control structure is sufficiently effective to permit a
reduction in the required substantive tests.
Answer: c

11. What is the most likely course of action that will be taken by an auditor in assessing
management integrity?
a. Tour the plant
b. Review the minutes of the board of directors
c. Research the background and histories of officers
d. Review bank reconciliation
Answer: c

12. An auditor who has been invited to submit a proposal for an audit engagement is a/an
a. predecessor auditor c. principal auditor
b. successor auditor d. interim auditor
Answer: b

13. What will an auditor who has been proposed for an audit engagement usually do prior to
accepting a new client?
a. Draft the financial statements of the client.
b. With the permission from the prospective client, contact the predecessor auditor to determine
if there are any disagreements between the client and the audit firms.
c. Obtain the potential client's permission to talk to the former auditor and review work papers.
d. Prepare an audit engagement letter.
Answer: b

14. Where client is changing auditors, PSA requires communication between predecessor and
successor auditors. The burden of initiating the communication rest with the
a. Predecessor auditor
b. client
c. incoming auditor
d. SEC
Answer: c

15. Prior to the acceptance of an audit engagement with a client who has terminated the services
of the predecessor auditor, the CPA should
a. a. Contact the predecessor auditor without advising the prospective client and request a
complete report of the circumstance leading to the termination with the understanding that all
information disclosed will be kept confidential.
b. b. Accept the engagement without contacting the predecessor auditor since the CPA can
include audit procedures to verify the reason given by the client for the termination.
c. c. Not communicate with the predecessor auditor because this would in effect be asking the
auditor to violate the confidential relationship between the auditor and client.
d. d. Advise the client of the intention to contact the predecessor auditor and request permission
for the contact.
Answer: d

16. When a CPA is approached to perform an audit for the first time, the CPA should make
inquires of the predecessor auditor. This is a necessary procedure because the predecessor may
be able to provide the successor with information that will assist the successor in determining.
a. a. Whether he predecessor's work should be utilized
b. b. Whether the company follows the policy of rotating its auditors
c. c. Whether in the predecessor's opinion internal control of the company has been satisfactory.
d. d. Whether the engagement should be accepted
Answer: d

17. When one auditor succeeds another, the successor auditor should request the
a. Client to instruct its attorney to send a letter of audit inquiry concerning the status of the prior
year's litigation, claims, and assessments.
b. Predecessor auditor to submit a list of internal accounting control weaknesses that have not
been corrected.
c. Client to authorize the predecessor auditor to allow a review of the predecessor auditor's
working papers.
d. Predecessor auditor to update the prior year's report to the date of the change of auditors.
Answer: c

18. Which of the following will an auditor least likely discuss with the former auditors of a
potential client prior to acceptance?
a. Integrity of management
b. Fees charged for services
c. Disagreement with management regarding accounting principles
d. Reasons for changing audit firms
Answer: b

19. In an audit, communication between the predecessor and successor auditor should be
a. authorized in an engagement letter
b. acknowledged in a representation letter
c. either written or oral
d. written and included in the working papers
Answer: c
20. A successor auditor plans to communicate with the predecessor in connection with an audit
of prospective client's financial statements. Such communication is acceptable if
a. the client consents
b. the predecessor auditor consents
c. the client and predecessor auditor consent
d. the client and successor auditor consent
Answer: c

21. Upon discovering material misstatements in a client's financial statements that the client
would not revise, the auditor withdrew from the engagement. If asked by the successor auditor
about the termination the engagement, the predecessor auditor should
a. State that he found material misstatements that the client would not revise
b. Suggest that the successor ask the client
c. Suggest that the successor obtain the client's permission to discuss the reasons
d. Indicate that a misunderstanding occurred
Answer: c

22. Before accepting an audit engagement, a successor auditor should make specific inquiries of
the predecessor auditor regarding the predecessor's
a. Opinion of any subsequent events occurring since the predecessor's audit report was issued
b. Understanding as to the reasons for the change of auditors
c. Awareness of the consistency in the application of GAAP between periods
d. Evaluation of all matters of continuing accounting significance
Answer: b

23. A successor auditor most likely would make specific inquiries of the predecessor auditor
regarding
a. Specialized accounting principles of the client's industry
b. The competency of the client's internal audit staff.
c. The uncertainty inherent in applying sampling procedures.
d. Disagreements with management as to auditing procedures.
Answer: d
24. Which of the following should an auditor obtain from the predecessor auditor prior to
accepting an audit engagement?
a. Analysis of balance sheet accounts
b. Analysis of income statement accounts
c. All matters of continuing accounting significance
d. Facts that might bear on the on the integrity of management
Answer: d

25. What information should a successor auditor obtain during the inquiry of the predecessor
auditor prior to acceptance of the audit?
I. Facts that bear on the integrity of management
II. Understanding or-the client as to the reasons for change of auditors
III. Disagreement with management concerning auditing procedures
IV. The amount of misstatement which the auditor considers to be material to the financial
statements.
a. I and II b. I and III c. I and IV d. III and IV
Answer: b

26. According to PSA 210, the auditor and the client should agree on the terms of engagement.
The agreed terms would need to be recorded in
a. memorandum to be placed in the permanent section of the auditing working papers
b. engagement letter
c. client representation letter
d. comfort letter
Answer: b

27. Engagement letter that documents and confirms the auditor's acceptance of the engagement
would normally be sent to the client.
a. before the audit report is issued
b. after the audit report is issued
c. at the end of fieldwork
d. before the commencement of the engagement
Answer: d

28. An engagement letter should ordinarily include information on the objectives of the
engagement and
CPA's responsibilities Client's responsibilities Limitation of engagement
a. Yes Yes Yes
b. Yes No Yes
c. Yes No No
d. No No No
Answer: a

29. The primary reason an engagement letter is obtained by audit firms prior to starting the work
is that
a. it clarifies the responsibilities of management and those of the auditor.
b. it defines the firm's policies and procedures regarding new clients.
c. it assures that all misstatements will be detected by the auditor.
d. it communicates the type of opinion that will be rendered on the engagement"
Answer: a

30. Which of the following best describes the purpose of the engagement letter?
a. The engagement letter relieves the auditor of some responsibility for the exercise of due care.
b. By clearly defining the nature of the engagement, the engagement letter helps avoid and
resolve Misunderstandings between CPA and client regarding the precise nature of the work to
be performed and the type of report to be issued.
c. The engagement letter informs the management of the detailed steps to be applied in the audit
process.
d. The engagement letter outlines the deficiencies in the client's business noted by the auditor
during the audit engagement.
Answer: b

31. Which of the following would be least likely to be included in the auditor's engagement
letter
a. Forms of the report
b. Extent of his responsibilities to his client
c. Objectives and scope of the audit
d. Type of opinion to be issued
Answer: d

32. An engagement letter would not normally include

a. billing arrangement
b. arrangement concerning client's assistance
c. details of the procedure that will be performed
d. expectation of receiving a representation letter from management
Answer: c

33. Arrangements concerning which of the following are least likely to be included in
engagement letter?
a. auditor's responsibilities
b. Fees and billing
c. CPA investment in client securities
d. Other forms of reports to be issued in addition to the audit report
Answer: c

34. The audit engagement letter should generally include a reference to 'each of the following
except
a. The expectation of receiving a written management representation letter
b. A request for the client to confirm the terms of the engagement
c. A description of the auditor's method of sample selection
d. The risk that material misstatements may remain undiscovered.
Answer: c

35. After preliminary audit, arrangements have been made, an engagement confirmation letter
should be sent to the client. The letter usually would not include
a. A reference to the auditor's responsibility for the detection of errors or irregularities
b. An estimate of the time to be spent on the audit work by audit staff and management
c. A statement that management advisory services would be made available upon request
d. A statement that a management letter will be issued outlining comments and suggestions as to
any procedures requiring the client's attention
Answer: c

36. The use of an engagement letter is the best method of documenting

I. The required communication of significant deficiencies in internal control structure
II. Significantly lower materiality levels than those used in the prior audit
III. The description of any letters or reports that the auditor expects to issue
IV. Notification of any changes in the original arrangements of the audit
a. I and II b. I and IV c. II and III d. III and IV
Answer: d