Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

UNIT I
FUNDAMENTALS OF
AUDITING AND ASSURANCE SERVICES

1. The Philippine Framework for Assurance Engagements identifies two types of assurance engagements a practitioner is
permitted to perform: a reasonable assurance engagement and a limited assurance engagement. Which of the ff. is the
objective of a reasonable assurance engagement?
A. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a
basis for a negative form of expression of the practitioner`s conclusion.
B. A reduction in assurance engagement risk to a very low level in the circumstances of the engagement as the basis
for a disclaimer of the practitioner`s conclusion.
C. A reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as a
basis for a positive form of expression of the practitioner`s conclusion.
D. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a
basis for a qualified form of expression of the practitioner`s conclusion.

2. Which of the following engagements is covered by the Framework for Assurance Engagements?
A. Consulting engagements
B. Preparation of tax returns
C. Independent financial statements audit.
D. Agreed-upon procedures engagement.

3. The ff. are the elements of an assurance engagement except;

A. Suitable criteria
B. An appropriate subject matter.
C. A two-party relationship involving a practitioner and intended users.
D. Sufficient appropriate evidence.

4. Which of the ff.is not an assurance engagement?

A. Compilation.
B. Financial statements audit.
C. Information reliability services
D. Reviews of prospective financial statements

5. The risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially
misstated
A. Assurance engagement risk
B. Materiality risk
C. Non-detection risk
D. Reasonable assurance risk

6. Which of the ff. is not an element of assurance engagement?

A. An appropriate subject matter
B. Suitable criteria
C. Sufficient appropriate evidence
D. Substantial engagement fee

7. Which of the ff. characteristics need not to be exhibited in determining the identified suitability of criteria of a subject
matter in an assurance engagement?
A. Completeness
B. Relevance
C. Understandability
D. Substantial acquisition cost

8. An attitude of professional skepticism means that the practitioner

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

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9. Independent auditing can best be described as a
A. Branch of accounting.
B. Discipline that attests to the result of accounting and other functional operations and data.
C. Professional activity that measures and communicates financial and business data.
D. Regulatory function that prevents the issuance of improper financial information.

10. Non-assurance engagements include all of the ff. except;

A. Agreed-upon procedures.
B. Management consulting.
C. Preparation of tax returns where no conclusion is expressed.
D. Compliance audit.

11. The independent audit is important to readers of financial statements because it

A. Determines the future stewardship of the management of the company whose financial statements are audited.
B. Measures and communicate financial and business data included in financial statements.
C. Involves the objective audit of and reporting on management-prepared statements.
D. Reports on the accuracy of all information in the financial statements.

12. Which of the ff. 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, cash flow, and
operations without the expertise of an independent auditor.
B. It is management`s responsibility to seek available independent aid in the appraisal of 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 customary courtesy that all stockholders of a company receive an independent report on management`s
stewardship in managing the affairs of the business.

13. When a CPA expresses an opinion on financial statements, his or her responsibilities extend to
A. The underlying wisdom of the client`s management decisions.
B. Whether the results of the client`s operating decisions are fairly presented in the financial statements.
C. Active participation in the implementation of the advice given to the client.
D. An ongoing responsibility for the client`s solvency.

14. The Philippine Framework for Assurance Engagement identifies two types of assurance engagements a practitioner is
permitted to perform: a reasonable assurance engagement and a limited assurance engagement. Which of the ff. is the
objective of a limited assurance engagement?
A. A reduction in assurance engagement risk to a very low level in the circumstances of the engagement as the basis
for a disclaimer of the practitioner`s conclusion.
B. A reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as a
basis for a positive form of expression of the practitioner`s conclusion.
C. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a
basis for a negative form of expression of the practitioner`s conclusion.
D. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a
basis for a qualified form of expression of the practitioner`s conclusion.

15. The subject matter of an assurance engagement can take the ff. forms except the
A. Historical or prospective financial statements.
B. Performance of an entity that could indicate efficiency and effectiveness.
C. The entity`s internal control.
D. Evaluation of a capital investment proposal.

16. The primary responsibility for the adequacy of disclosure in the financial statements for a publicly held company rests
with the
A. Partner assigned to the audit engagement.
B. Management of the company.
C. Auditor in charge of the field work.
D. Securities and Exchange Commission.

17. Which of the ff. is responsible for the fairness of the representations made in financial statements?
A. Client`s management
B. Independent auditor
C. Audit committee
D. PICPA

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18. The criteria for evaluating quantitative information vary. Example, in the audit of historical financial statements by
CPA firms, the criteria are usually
A. International auditing standards.
B. Financial reporting standards
C. Regulations of the Bureau of Internal Revenue
D. Regulations of the Securities and Exchange Commission

19. The process of recording , classifying, and summarizing economic events in a logical manner for the purpose of
providing financial information for decision making is
A. Accounting
B. Auditing
C. Management
D. Economics

20. An audit independence issue might be raised by the auditor`s participation in management advisory services
engagements. Which of the ff. statements is the most consistent with the professions attitude toward this issue?
A. Information obtained as a result of a management advisory services engagement is confidential to that specific
engagement and should not influence performance of the attest function.
B. The decision as to loss of independence must be made by the client based upon the facts of the particular case.
C. The auditor should not make management decisions for an audit client.
D. The auditor who is asked to review management decisions is also competent to make these decisions and can do
so without loss of independence.

21. This refers to the audit procedures that, in the auditor`s judgment and based on the PSA`s are deemed appropriate in the
circumstances to achieve the objective of an audit.
A. Analytical procedures
B. Scope of an audit
C. Audit sampling
D. Documentation.

22. Which of the ff. is not an assurance engagement?

A. Information System Reliability Service.
B. Business Performance Measurement.
C. Risk Assessment Service
D. Management Consulting Service.

23. Assurance engagements should exhibit the ff. elements except

A. A subject matter.
B. Suitable criteria
C. An engagement process
D. Appropriate professional fees.

24. Which of the ff. criteria is unique to the auditor`s attest function?
A. General competence.
B. Familiarity with the particular industry of which the auditor`s client is part.
C. Due professional care.
D. Independence.

25. Which of the ff. may not be an appropriate form of the subject matter of an assurance management?
A. Historical financial information.
B. Systems and processes.
C. Behavior.
D. Non-physical characteristics of a facility.

26. Which of the ff. is not a component of engagement risk?

A. Control risk
B. Inherent risk
C. Business risk
D. Detection risk

27. Auditing is based on the assumption that financial data and statements are
A. In conformity with appropriate criteria.
B. Verifiable.
C. Presented fairly.
D. Consistently applied.

28. The primary reason why a CPA firm establishes quality control policies and procedures for human resources is to

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 A. Comply with the continuing educational requirements imposed for all staff accountants in CPA firms.
B. Establish in fact as well as in appearance that staff accountants are increasing their knowledge of accounting and
auditing matters.
C. Provide a forum for staff accountants to change their experiences and views concerning firm policies and
procedures.
D. Provide reasonable assurance that staff personnel will have the capability, competence and commitment to ethical
principles required to enable them to fulfill their responsibilities in accordance with professional standards and
regulatory and legal requirements.

29. In pursuing its quality control objectives with respect to assigning personnel to engagements, a CPA firm may use
policies and procedures such as following:
A. Rotating employees from assignment to assignment on a random basis to aid in the staff training effort.
B. Requiring timely identification of the staff requirements of specific engagements so that enough qualified
personnel can be made available.
C. Allowing staff to select the assignment of their choice to promote better client relationships.
D. Assigning a number of employees to each engagement in excess of the number required so as not to overburden
the staff and interfere with the quality of the audit work performed.

30. The accounting firm should establish policies and procedures assigned to promote an internal culture based on the
recognition that quality is essential in performing engagements. This may be communicated through the ff. means
except
A. Training seminars.
B. Formal and Informal dialogue.
C. Publication in PICPA newsletter.
D. Mission statements.

31. In pursuing its quality control objectives with respect to acceptance of a client, a CPA firm is not likely to
A. Make inquiries of the proposed client`s legal counsel.
B. Review financial statements of the proposed client.
C. Make inquiries of previous auditors.
D. Review the personnel practices of the proposed client.

32. A CPA establishes quality control policies and procedures for deciding whether to accept or continue a client. The
primary purpose for establishing such policies and procedures is to
A. Enable to auditor to attest the integrity or reliability of a client.
B. Comply with the quality control standards established by the regulatory bodies.
C. Lessen the exposure to litigation resulting from failure to detect irregularities in client financial statements.
D. Minimize the likelihood of association with clients whose management lacks integrity.

33. In pursuing its quality control objectives with respect to independence, a CPA firm may use policies and procedures
such as the ff. except
A. Emphasizing independence in mental attitude in firm training programs and in supervision and review of work.
B. Prohibiting employees from owning shares of the stock of publicly traded companies.
C. Suggesting that employees conduct their banking transactions with banks that do not maintain accounts with client
firms.
D. Assigning employees who may lack independence to research positions that do not require participation in field
audit work.

34. Engagement risks is influenced by the risks associated with the ff. except
A. Nature and form of the subject matter.
B. Nature and form of the criteria applied to the subject matter.
C. Nature and extent of the process used to collect and evaluate evidence.
D. Unreasonably low professional fee.

35. Which of the following is not an element of quality control that should be considered by a firm of independent
auditors?
A. Assigning personnel to engagements.
B. Consultation with appropriate persons.
C. Keeping records of quality control policies and procedures.
D. Supervision.

36. A practitioner should plan and conduct the assurance engagement in an effective manner to meet the objective of the
engagement. Which of the ff. matters need not to be a concern of the practitioner in planning the work?
A. Criteria to be used.
B. Engagement objective.
C. Personnel and expertise requirements.
D. Specific format of the assurance report.

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37. A firm of CPAs may use policies and procedures such as notifying professional personnel as to the names of audit
clients having publicly held securities and confirming periodically with such personnel that prohibited relations do not
exist. This is done to achieve quality control in which of the ff. areas?
A. Acceptance and continuance of clients.
B. Human resources.
C. Ethical requirements.
D. Leadership responsibilities for quality within the firm.

38. The decision of whether the criteria are suitable involves considering whether the subject matter of the assurance
engagement is capable of reasonably consistent evaluation or measurement using such criteria. Which of the ff.
characteristics is not considered necessary in determining whether the criteria are suitable?
A. Relevance
B. Neutrality
C. Reliability
D. Sufficiency

39. A CPA establishes quality control policies and procedures for deciding whether to accept a new client or to continue to
perform services for a current client. The primary purpose for establishing such policies and procedures is to
A. Comply with financial reporting standards.
B. Comply with the quality control standards established by the regulatory bodies.
C. Comply with standards of auditing.
D. Minimize the likelihood of association with clients whose management lacks integrity.

40. The accounting firm should establish policies and procedures designed to provide it with reasonable assurance that the
firm and its personnel comply with relevant ethical requirements. Which of the ff. is not among the fundamental
principles of professional ethical requirements relating to assurance and related services?
A. Integrity
B. Objectivity
C. Professional competence and due care
D. Maximization of wealth.

41. An operation audit differs in many ways from an audit of financial statements. Which of the ff. is the best example of
one of these differences?
A. The usual audit of financial statements covers the four basic statements, whereas the operational audit is usually
limited to either balance sheet or the income statement...
B. The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single
accounting period.
C. Operational audits do not ordinarily result in the preparation of a report.
D. The operational audit deals with the pre-tax income.

42. The review of a company`s financial statements by a CPA firm:

A. Is substantially less in scope of procedures than an audit.
B. Requires detailed analysis of the major accounts.
C. Is of similar scope as an audit and adds similar credibility to the statements.
D. Culminates in issuance of a report expressing in the CPA`s opinion as to the fairness of the statements.

43. Operational auditing is primarily oriented toward:

A. Future improvements to accomplish the goals of management.
B. The accuracy of data reflected in management`s financial records.
C. The verification that a company`s financial statements are fairly presented.
D. Past protection provided by existing internal control.

44. A typical objective of an operational audit is for the auditor to:

A. Determine whether the financial statements fairly present the entity`s operations.
B. Evaluate the feasibility of attaining the entity`s operational objectives.
C. Make recommendations for improving performance.
D. Report on the entity`s relative success in attaining profit maximization.

45. A review on any part of an organizations procedures and methods for the purpose of evaluating efficiency and
effectiveness is classified as a(n)
A. Audit on financial statements.
B. Compliance audit.
C. Operational audit.
D. Production audit.

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46. An audit to determine whether the audited is following specific procedures or rules set down by some higher authority
is classified as a(n)
A. Audit on financial statements.
B. Compliance audit.
C. Operational audit.
D. Production audit.

47. The primary reason for an audit by an independent, external audit firm is to
A. Satisfy governmental regulatory requirements.
B. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered.
C. Relieve management of responsibility for the financial statements.
D. Provide increased assurance to users as to the fairness of the financial statements.

48. Which of the ff. attributes is more closely associated with assurance services performed by a CPA firm than with other
lines of professional work?
A. Integrity.
B. Competence
C. Independence
D. Keeping informed in current professional developments.

49. Which of the ff. types of management advisory services may not be performed by a CPA firm that wants to maintain its
independence with respect to the client?
A. Training of employees.
B. Making recommendations for improvements in internal control.
C. Screening and interviewing applicants for a new accounting position.
D. Supervising computer employees.

50. In pursuing its quality control objectives, a CPA firm may maintain records indicating which of its partners or
employees were previously employed by its clients. Which quality control element would this be most likely to satisfy?
A. Leadership responsibilities for quality within the firm.
B. Human resources.
C. Ethical requirements.
D. Engagement performance.

51. In determining the scope and nature of services to be performed in public practice, a CPA firm should:
A. Require independence for all services performed.
B. Determine that the performance of all services is consistent with the firm`s members` role as professionals.
C. Have in place internal control procedures.
D. Only perform accounting related services.

52. Error that arises from an isolated event that has not recurred other than or specifically identifiable occasions and is
therefore not representative of errors in the population.
A. Expected error.
B. Anomalous error.
C. Sampling error.
D. Unintentional error.

53. A government audit evaluates a disbursement to determine if it is necessary, excessive or extravagant in accordance
with existing rules and regulations. What kind of audit is he conducting?
Compliance Audit Economy Audit
A. Yes No
B. No Yes
C. Yes Yes
D. No No

54. Inherent limitations in an audit stem from the ff. factors except
A. Most audit evidence is persuasive rather than conclusive
B. Use of testing.
C. Accounting and internal control system limitation.
D. Incompetence of an auditor.

55. Operational auditing refers to the study of business operations for the purpose of making recommendations for all of
the following except
A. Economic and efficient use of resources.
B. Effective achievement of business objective.
C. Attesting to the fairness of the financial statements.
D. Compliance with company policies.

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56. Which of the ff. is not one of the concepts in the framework of auditing theory?
A. Ethical conduct
B. Conflict of interest
C. Evidence
D. Fair presentation.

57. The forecast projection standards do not require

A. A caveat that the prospective results may not be achieved.
B. A statement that examination was made in accordance with standards established by the Auditing Standards
Council.
C. An opinion on the prospective financial statements.
D. A statement that the accountant should be independent.

58. Internal auditors` role in preventing and detecting fraud would not include the
A. Audit of abnormal expenditures.
B. Audit of sensitive expenses such as foreign sale expenses.
C. Review of company’s` policies regarding questionable payments.
D. Direct responsibility of reporting fraud to the SEC.

59. A CPA examines the financial statements of a local bank. According to the code of ethics, the appearance of
independence ordinarily would not be impaired if the CPA
A. Serves on the bank`s committee that approves loan.
B. Owns several of the bank`s ordinary shares.
C. Obtains a short-term loan from the bank.
D. Uses the bank`s timesharing computer services to solve client-related problems.

60. A CPA should not undertake a management advisory service engagement that includes continued participation through
implementation, unless
A. Upon implementation of a new study and evaluation of the system of internal control is performed.
B. Upon implementation, the client`s personnel will have the knowledge and ability to adequately maintain and
operate such systems as may be involved.
C. The CPA accepts overall responsibility for implementation of the chosen course of action.
D. The CPA acquires an overall knowledge of the client`s business that is equivalent to that possessed by
management.

61. Santos, a CPA not in public practice, is an employee in the internal audit department of Tower`s company. The
management has asked Santos to perform examinations of potential acquisitions and to express an opinion thereon.
Santos will use the reports for internal purposes and to show to its bankers in accordance with certain loan agreements.
How should Santos sign the report?
A. Santos, CPA
B. Santos, Internal auditor
C. Santos, CPA (Internal Auditor)
D. Santos, Internal Auditor (CPA)

62. An auditor should not render a report on

A. The achievability of forecasts.
B. Client internal control.
C. Management performance.
D. Quarterly financial information.

63. The CPA in public practice violates the Code of Ethics for Professional Accountants if he accepts a fee which was
A. Fixed by a public authority.
B. Determined. Based on the results of judicial proceedings.
C. Payable after a specified finding was obtained.
D. Based on the actual audit time charges.

64. Contingent fees charged by CPAs engaged in tax practice are permitted under the rules of professional conduct because
A. This practice establishes fees which are commensurate with the value of the services.
B. Attorneys in tax practice customarily contingent fees.
C. Determination by taxing authorities are a matter of judicial proceedings which do not involve third parties.
D. The consequences are based upon findings of judicial proceedings or the findings of tax authorities.

65. A CPA accepts an engagement for a professional service without violating the rules of Professional Conduct if the
service involves
A. The preparation of cost projections for submission to a government agency as an application for a rate increase,
and the fee will be paid if there is a rate increase.

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 B. Tax preparation, and the pay will be based on whether the CPA signs the tax return prepared.
C. A litigatory, and the fee is not known but it is to be determined by a district court.
D. Tax return preparation and the fee is to be based on the amount of taxes saved.

66. The Code of Ethics provides that when a CPA is required to express an opinion on combined or consolidated financial
statements which include a subsidiary, branch, or other component audited by another independent public accountant,
the CPA may
A. Insist on auditing any such component which the CPA deems necessary to warrant the expression of an opinion.
B. Insist only on performing a review of any such component.
C. Not insist on auditing any such component but may request copies of all working papers relevant to the other
independent public accountant`s examination.
D. Not insist on auditing any such component of reviewing working papers belonging to the other independent public
accountant.

67. Which of the ff. act when committed by a CPA constitutes a violation of the Code of Ethics:
A. Rendering management services to a non-audit client.
B. Offering a position with higher salary to a staff member of another CPA.
C. Charging a professional fee on the savings gained by a client on a tax case.
D. Providing accounting service to a non-audit client.

68. An auditing firm is allowed to offer employment to an employee of another CPA in public practice if the CPA
A. Inform the other CPA in public practice prior to making the offer.
B. Makes the offer verbally to an employee who is not a CPA.
C. Makes the offer on behalf of an audit client.
D. Has an executive search staff that is involved in personnel placement.

69. The CPA should not

A. Render management consulting services to an audit client.
B. Accept a position with another firm without informing his present employer.
C. Advise clients and professional contacts of the opening of a new office.
D. Describe himself as tax expert or management consulting specialist.

70. Ethically, the auditor could

A. Advertise only as to his expertise in preparing income tax returns.
B. Base his audit fee on a percentage of the proceeds of his client`s stock issue.
C. Own preferred stock in corporation which is an audit client.
D. Perform an examination for a financially distressed client at less than his customary fees.

71. Which of the ff. is allowable under the rules against advertising?
A. A news item relating to a technical paper read by a CPA at a seminar.
B. A bold listing of the CPA`s name and address in a telephone directory.
C. An announcement as to the expertise in providing taxation services by the CPA.
D. A letter to trade chamber offering audit services at reduced group rates.

72. Inclusion of which of the ff. in a promotional brochure published by a CPA firm would be most likely to result in a
violation of the Code of Ethics?
A. Names and addresses, telephone numbers, number of partners, office hours, foreign language competence, and
date the firm was established.
B. Services offered.
C. Educational and professional attainments, including date and place of certification, degrees received, and
membership in professional associations.
D. Names, addresses and telephone numbers of the firm`s clients, including the number of years served.

73. Richard, CPA performs accounting services for Tower Corporation. Tower wishes to offer its shares to the public and
asks Richard to audit the financial statements prepared for registration purposes. Richard refers Tower to Cruz, CPA,
who is more competent in the area of registration statements. Cruz performs the audit of Tower`s financial statements
and subsequently thanks Richard for the referral by giving Richard a portion of the audit fee collected. Richard accepts
the fee. Who, if anyone, has violated the professional ethics?
A. Only Richard.
B. Both Richard and Cruz.
C. Only Cruz.
D. Neither Richard nor Cruz.

74. Dela Cruz, a non-CPA, has a law practice. Dela Cruz has recommended one of his clients to Gomez, CPA. Gomez has
agreed to pay Dela Cruz 10% of the fee for services rendered by Gomez to Dela Cruz client. Who, if anyone, is in
violation of the Code of Ethics?

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 A. Both Dela Cruz and Gomez.
B. Neither Dela Cruz nor Gomez.
C. Only Dela Cruz.
D. Only Gomez.

75. Which of the ff. is prohibited by the Code of Professional Ethics?

A. Use of a firm name which indicates specialization.
B. Listing educational attainment in application for employment.
C. Use of a partnership name for a limited period by one of the partners in a public accounting firm after the death or
withdrawal of all other partners.
D. Holding as an investment 10 of 1,000 outstanding shares in a commercial corporation which performs business
processing outsourcing services.

76. Which of the ff. is prohibited by the Code of Ethics for Professional Accountants in the Philippines?
A. Use of a firm name which includes the name of retired partner.
B. Announcement in a newspaper of the opening of a public accounting office.
C. Engaging in civic activities during business hours.
D. Accepting an engagement or employment which one cannot reasonably expect to complete or discharge with
professional competence.

77. In the preparation of an income tax return, the CPA is expected to

A. Take a position of client advocacy.
B. Take a position of independent neutrality.
C. Present the reconciliation of net income in the audited financial statements with the taxable net income in the
income tax return.
D. Reconcile the expenses in the audited financial statements with the allowable deductions in the income tax return.

78. Which of the ff. actions should be avoided by a CPA?

A. A CPA in public practice agrees to be treasurer of a Lions Club.
B. A CPA, officer of the bank, assists another CPA in practice to obtain a loan from said bank.
C. A CPA in the government services without BOA accreditation signs an audit report to accompany a company`s
income tax return.
D. A CPA teaching in a university accepts an audit engagement with an exporting firm.

79. During the course of an audit, the independent CPA is often called upon to give informal advice on many diverse
questions. This type of service differs from management advisory services in that this type of service is informal and
therefore
A. The CPA does not make any warranties with respect to the competence of the extemporaneous.
B. The CPA is not exposed to liability as a consequence of the extemporaneous advice.
C. No presumption should exist that all pertinent facts have been identified and considered.
D. No presumption should exist that the advice will impact upon the operations of the business enterprise.

80. A person is not considered in the practice of accountancy of education if in an educational institution, he teaches
A. Humanities.
B. Management Advisory Services.
C. Financial accounting.
D. Taxation.

81. A council created by the Professional Regulation Commission upon the recommendation of the Board of Accountancy
to assist the BOA in the promulgation of accounting standards.
A. Education Technical Council.
B. CPE/CPD Council
C. Auditing and Assurance Standards Council.
D. Financial Reporting Standards Council.

82. Assurance Engagement involves rendering the ff. services except

A. Audits.
B. Reviews
C. Information System Reliability
D. Compilation of Financial or other information.

83. Cruz, Santos, CPAs was hired by RFC Inc. to prepare unaudited financial statements. The statement that best describe
this engagement is
A. The CPA is performing an accounting service rather than an examination of the financial statements.
B. The financial statements are representations of both management and the CPA.
C. The CPA must perform the audit in accordance with standards of auditing necessary to determine that the
statements are in conformity with financial reporting standards.

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 D. The CPA may prepare the statements from the books, but may not assist in adjusting and closing the books.

84. Internal auditing relates to

A. Audit which serves the needs of management.
B. Audit which is performed by a professional practitioner as an independent contractor.
C. Audit which is incidentally concerned with the detection and prevention of fraud.
D. Audit wherein the auditor should be independent of management both in fact and in mental attitude.

85. The main objective of operational auditing is

A. To evaluate the integrity of accounting information.
B. To verify fulfillment of plans and sound business requirement.
C. To measure and evaluate the effectiveness of controls.
D. To produce results as desired or directed.

86. Internal auditing is a dynamic profession. Which of the ff. best describes the scope of internal auditing as it has
developed to date?
A. Internal auditing involves appraising the economy and efficiency with which resources are employed.
B. Internal auditing involves evaluating compliance with policies, plans, procedures, laws, and regulations.
C. Internal auditing has evolved to verifying the existence of assets and reviewing the means of safeguarding assets.
D. Internal auditing has evolved to more of an operational orientation from a strictly financial orientation.

87. Which of the ff. activities best describes the term operational audit?
A. Seeks out aspects of company operations in which introduction of proper controls would reduce waste.
B. The job of implementing financial and accounting controls in a newly organized company.
C. Constant review of the administrative controls as they relate to the operations of the company.
D. Verification of the fair presentation of a company`s results of operation.

88. Which of the ff. statements best describes the relationship between an external auditor and an internal auditor?
A. An internal auditor is more likely to be concerned with internal accounting control; while an external auditor
shall be more interested with operational auditing.
B. Although the internal auditor and external auditors have differences in the independence of their positions, they
nevertheless serve similar types of interests.
C. Both the internal auditor and external auditor have the same degree of concern about financial status and results of
operations.
D. The practitioners in the two fields use basically an identical approach; however, there are differences in the
application of auditing techniques.

89. When an independent auditor decides that the work performed by internal auditors may have a bearing on the nature,
timing, and extent of contemplated audit procedures, the independent auditor should plan to evaluate the objectivity of
the internal auditors. Relative to the objectivity, the independent auditor should
A. Consider the organizational level to which internal auditors report the results of their work.
B. Review the quality control program in effect for the internal audit staff.
C. Examine the quality of the internal audit reports.
D. Consider the qualifications of the internal audit staff.

90. Government auditing often extend beyond examinations leading to the expression of opinion on the fairness of
financial presentation and includes audits on efficiency, effectiveness, and
A. Internal Control
B. Evaluation
C. Accuracy
D. Compliance.

91. In government auditing, the three elements of expanded scope auditing are
A. Goal analysis, audit of operations, audit of systems.
B. Financial and compliance, economy and efficiency, program results.
C. Preaudit, post audit, internal audit.
D. National government audit, local government audit, corporation audit.

92. The Constitution of the Philippines requires this office to “keep the general accounts of the government and for such
period as may be provided by the law, preserve the vouchers pertaining thereto”:
A. National Budget Office, Budget Ministry.
B. Department of Finance
C. Accounting units.
D. Commission on Audit.

93. One of the statements below cannot be considered an objective of the Commission on Audit.
A. Development and implementation of comprehensive audit program for government.

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 B. Keeping and enhancement of the information value of government accounts.
C. Assuming fiscal responsibility for the government and its instrumentalities.
D. Preparing the government budget.

94. Under the law, the chief executive officer of the Commission on Audit is the
A. Commissioner
B. Division manager
C. Chairman
D. Executive Director
E. Commission secretary.

95. The members who compose the commission on audit should

A. Be a Commissioner and an Associate commissioner.
B. Hold office for nine years without reappointment.
C. Be a CPA or member of the bar with at least ten years’ experience.
D. Be a member of the bidding committee of the agency.

96. Auditors of the Commission on Audit perform the role of

A. Internal auditors.
B. Independent auditors.
C. Management accountants.
D. Financial consultants.

97. One of the government auditing standards which is not observed by independent CPAs in the private sector is
A. The audit is to be adequately planned and assistants are to be properly supervised.
B. A review shall be made of compliance with legal and statutory requirements.
C. An evaluation shall be made of the system of internal control.
D. Sufficient competent evidential matter shall be obtained through inspection, observation, inquiries and
confirmations.

98. Which of the ff. functions of the government auditors is also performed by independent CPAs?
A. Preserve vouchers pertaining to transactions.
B. Countersign checks or treasury warrants.
C. Inspect deliveries of goods purchased.
D. Examine accounts pertaining to revenues and expenditures and uses of funds and property.

99. One of the central offices created by the commission on Audit is the National Government Audit Office. Its function is
to
A. Advise and assist the chairman on matters pertaining to the audit of departments, regions, bureaus, and offices of
the National Government.
B. Exercise technical supervision over government accounting system.
C. Formulate long range and annual plans and programs for the commission.
D. Provide the commission with services related to personnel, record, supplies, security, general and other related
services.

100. A CPA shall not practice under a firm name that includes or indicates the ff. 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 successor partnership.

101. A CPA purchased stock in a client corporation and place it in a trust as an educational fund for the CPAs minor child.
The trust securities were not material to the CPA but were material to the child`s personal worth. Would the
independence of the CPA be considered to be impaired with respect to the client?
A. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a
factor.
B. Yes, because the stock would be considered an indirect financial interest that is material to the CPAs child.
C. No, because the CPA would not be considered to have a direct financial interest in the client.
D. No, because the CPA would not be considered to have a material indirect financial interest to the client.

102. Without the consent of the client, a CPA should not disclose confidential client information contained in working
papers to a
A. Quality control review body formed by the BOA.
B. CPA firm that has purchased the CPAs accounting practice.
C. National Court that has issued a valid subpoena.
D. Disciplinary body created under statute.

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 103. After beginning an audit of a new client, Barkin, CPA, discovers that the professional competence necessary for the
engagement is lacking. Barkin informs management of the situation and recommends another CPA, and management
engages the other CPA. Under these circumstances,
A. Barkin`s lack of competence should be considered to be a violation of the generally accepted auditing standards.
B. Barkin may request compensation from the client for any professional services rendered to it in connection with
the audit.
C. Barkin`s request for a commission for a commission from the other CPA is permitted because a more competent
audit can now be performed.
D. Barkin maybe indebted to the other CPA since the other CPA can collect from the client only the amount the client
originally agreed to pay Barkin.

104. In determining estimates of fees, an auditor may take account each of the ff. except the
A. Value of the service to the client
B. Degree of responsibility assumed by undertaking the engagement.
C. Skills required to perform the service.
D. Attainment of specific findings.

105. A violation of the profession`s ethical standards would most likely occur when a CPA who
A. Is also admitted to the Bar, represents on letterhead to be both an attorney and a CPA.
B. Writes a newsletter on financial management, also permits a publishing company to solicit directions by direct
mail.
C. Is controller of a bank, permits a bank to use the controller`s CPA tittle in the listing of officers in its publications.
D. Forms a partnership for accountancy practice with non-CPAs.

106. Independent auditing can be best described as

A. A branch of management services.
B. A branch of accounting.
C. A professional activity that measures and communicates financial and business data.
D. A discipline which attests to the results of accounting and other functional operations and data.

107. The ff. statements relate to the Philippine Accountancy Act of 2004. Which statement is true?
A. The professional regulation commission has the authority to remove any member of the Board of Accountancy,
for negligence, incompetence, or any other just cause.
B. Insanity is not a ground for proceeding against a CPA.
C. A person shall be considered to be in the professional practice of accounting if, as an officer in private enterprise,
he makes decisions requiring professional accounting knowledge even if his position does not require that the
holder should be a CPA.
D. After two years, subject to certain conditions, the board of accountancy may order the reinstatement of a CPA
whose certificate of registration has been revoked.

105. A violation of the profession’s ethical standards would most likely occur when a CPA who

a. is also admitted to the Bar, represents on letterhead to be both attorney and a CPA.

b. writes a newsletter on financial management, also permits a publishing company to solicit subscription by direct
mail.

c. is controller of a bank, permits the bank to use the controller’s CPA title in the listing of officers in its publication

d. forms a partnership for accountancy practice with non-CPAs.

106. Independent auditing can best be describe as

a. a branch of management services.

b. a branch of accounting.

c. a professional activity that measures and communicates financial and business data.

d. a discipline which attests to the results of accounting and other functional operations and data.

107. The following statements relates to the Philippine Accountancy Act of 2004. Which statement is true?

a. The Professional Regulation Commission has the authority to remove any member of the Board of Accountancy for
negligence, incompetence, or any other just cause.

b. Insanity is not a ground for proceeding against a CPA.

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 c. A person shall be considered to be in professional practice of accounting if, as an officer in a private knowledge even
if his position does require that the holder should be a CPA.

d. After two years, subject to the certain conditions, the Board of Accountancy may order the reinstatement of a CPA
whose certificate of registration has been revoked.

108. In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has
been retained as the auditor of a

a. charitable organization in which an employee of the CPA serves as treasurer.

b. municipality in which the CPA owns P250,000 of the p2,500,00 indebtedness of the municipality.

c. cooperative apartment house in which the CPA owns as apartment and is not part of the management.

d. company in which the CPA’s investment club owns a one-tenth interest.

109. A CPA should not submit unaudited statements of a nonpublic company to a client or others unless, as a minimum, the CPA
complies with the provision applicable to

a. compilation engagements.

b. review engagements.

c. statements on auditing standards.

d. assurance engagements.

110. When an accountant is not independent, the accountant is precluded from issuing a

a. compilation report.

b. review report

c. management advisory report.

d. tax planning report.

111. When a certified public accountant who is not independent is associated with financial statements, he would be precluded
from expressing an opinion because

a. the public would be aware of his lack of independence and would place little or no faith in his opinion.

b. he would place himself in the position of suffering an adverse decision in a possible liability suit.

c. he would be in the position of auditing his own work.

d. any auditing procedures he might perform would not be in accordance with PSAs.

112. The profession’s ethical standards would most likely be considered to have been violated when the CPA represents that
specific consulting services will be performed for a stated fee and it is apparent at the same time of the representation that the

a. CPA would not be independent.

b. fee was a competitive bid.

c. actual fee would be substantially higher.

d. actual fee would be substantially lower than the fee charged by other CPAs for comparable services.

113. The form of communication with a client in a management advisory service consultation should be

a. either oral or written.

b. oral with appropriate documentation in the work papers.

c. written and copies should be sent to both management and the board of directors.

d. written and a copy should be sent to both management and the board of directors.

114. Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently
gives an opinion on an audit of a client’s financial statements?

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 a. The CPA is liable only to third parties in privity of contract with the CPA.

b. The CPA is liable only to known users of the financial statements.

c. The CPA probably is liable to any person who suffered a loss as a result of the fraud.

d. The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion.

115. In rare cases auditors have been held liable for criminal acts. A criminal conviction against an auditor can result only when it
is demonstrated that the auditor

a. was negligent.

b. was grossly negligent.

c. intended to deceive or harm others.

d. caused a financial loss to an innocent third party.

116. The risk that the audit will fail to uncover a material misstatement is eliminated

a. if client has good internal control.

b. if client follows financial reporting standards.

c. when the auditor has complied with Philippine Standards on Auditing (PSA).

d. under no circumstances

117. Several months after an unqualified audit report was issued, the auditor discovers the financial statements were materially
misstated. The client’s chief executive officer agrees that the statements are misstated, but refuses to issue a correction,
and claims that “confidentiality” prevents the CPA from informing anyone.

a. CEO is correct. Auditor must maintain confidentiality.

b. CEO is wrong, but since auditor’s report is issued, it is too late to retract.

c. CEO is wrong and the auditor has an obligation to issue a revised correct audit report, even if CEO will not revise
and correct the financial statements.

d.CEO is correct, but to be ethically correct the auditor should violate the confidentiality rule and disclose the error.

118. Where a reasonable basis exists for omission of an answer to an applicable question on a tax return

a. the question may be ignored.

b. a brief explanation of the reason for the omission should be provided.

c. the question should be marked as non-applicable.

d. a note should be provided which states that the answer will be provided if the information is requested.

119. A CPA who is engaged to prepare an income tax return has a duty to prepare it in sucj a manner that the tax is

a. the legal minimum

b. computed in conformity with generally accepted accounting principles.

c. supported by the client’s audited financial statements.

d. not subject to change upon audit.

120. Under which of the following circumstances would the independence of a CPA be considered impaired if the CPA, who is
also an attorney, serves as auditor and provides legal services to the same client?

a. When the CPA, as legal agent, consummates a business acquisition for the client.

b. When the CPA’s audit fees and legal fees are not billed separately.

c. when the CPA uses legal expertise to research a question of income tax law.

d. When the legal services consist of an analysis of the terms of a lease agreement.

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121. An audit designed to evaluate the efficiency and effectiveness of an organization or some part thereof would not come under
the title of

a. performance audit

b. management audit

c. operational audit

d. compliance audit

122. which of the following is not one of the major differences between financial and operational auditing?

a. The financial audit is oriented to the past whereas an operational audit concerns performance for the future.

b. The financial audit report is distributed to many readers whereas the operational audit report goes to a few managers.

c. Financial audits are limited to matter that directly affect the financial statements whereas operational audits cover
any aspect of efficiency and effectiveness.

d. Financial audits deal with the information on the financial statements whereas operational audits are concerned with
the information in the ledgers.

123. In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential
information obtained during the course of a professional engagement?

a. The CPA is issued a summons enforceable by a court order which order the CPA to present confidential information.

b. A major stockholder of a client company seeks accounting information from the CPA after management declined to
disclose the requested information.

c. Confidential client information is made available as part of a quality review of the CPA’s practice by a peer review
team authorized by the PICPA.

d. An inquiry by a disciplinary body of government regulators.

124. Which of the following is not one of the broad categories of operational auditors?

a. Functional audits.

b. Organizational audits.

c. Single Act Audits.

d. Special assignment audits.

125. Which of the following groups would not be involved in an operational audit?

a. Internal auditors.

b. Government auditors.

c. CPA firms.

126. To maximize their effectiveness, the internal audit department should not report to the

a. Controller.

b. President.

c. Chairperson of the Board of Directors.

d. Board of Directors.

127. When CPA firms do an audit of historical financial statements, part of the audit usually consists of identifying problems and
making recommendations that may benefit the audit client. The recommendations can be made orally but they are
typically made by use of a

a. letter of representation.

b. engagement letter.

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 c. management letter.

d. client letter.

128. The two most important qualities for an operational auditor are

a. independence and competence.

b. competence and technical training.

c. personality and appearance.

d. academic background and sufficient experience.

129. Independence of internal auditors is not enhanced by

a. having the internal audit department report to the board of directors.

b. having government auditors report to a level above tha operating departments.

c. drafting procedures and designing accounting systems.

d. having the internal audit department report to the president.

130. Which of the following statements is not correct?

a. Objectivity requires that internal auditors have an independent mental attitude.

b. Internal auditors should be independent of the activities they audit.

c. It is acceptable for internal auditors to recommend changes in operations and to install and implement the operating
systems, as long as they do not have the responsibility for operating them throughout the year.

d. The internal auditor should not be responsible for correcting deficiency when ineffective or inefficient operations are
found.

131. There are several sources that the operational auditor can utilize in developing specific evaluation criteria. An are that would
not be such a source is

a. generally accepted accounting principles.

b. historical performance, such as results from prior periods.

c. comparable performance, such as the data of comparable entities.

d. discussion and agreement between the management of the entity to be audited, the operational auditor, and the entity
or persons to whom the findings will be reported.

132. Which of the following is not one of the three phases in an operational audit?

a. Planning

b. Review of the international control structure.

c. Evidence accumulation and evaluation.

d. Reporting and follow-up.

133. The different types of evidences are equally applicable for operational and financial auditing. However, the two which are
used less extensively in operational auditing are.

a. documentation and client inquiry

b. observation and physical examination

c. confirmation and mechanical accuracy

d. analytical tests and client inquiry.

134. Which of the following is not prohibited by the Code for Ethics for Professional Accountants in the Philippines?

a. Advertising and solicitation of clients.

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 b. Payment of commission to obtain a client.

c. Receiving a contingent fee on a tax case before the Bureau of Internal Revenue.

d. Offering employment to staff member of another CPA without first informing the CPA.

135. The CPA profession deemed it necessary to establish a Code of Ethics and a mechanism to its enforcement because

a. an ethical code that stresses the CPA’s responsibility to clients and colleagues is a prerequisite to success.

b. a requirement of law provides that CPAs establish a code of ethics.

c. acceptance of responsibility to the public is a distinguishing mark of a profession.

d. the establishment of flexible ethical standards provides self-protection for CPAs.

136. A typical objective of an operational audit is to determine whether an entity’s

a. internal control structure is adequately operating as designed.

b. operational information is in accordance with generally accepted governmental auditing standards.

c. financial statements present fairly the results of operations.

d. specific operating units are functioning efficiently and effectively.

137. Internal auditing is considered to be part of an organization’s

a. accounting system

b. internal control procedures.

c. control environment.

d. external controls.

138. Which of the following is not required of an individual seeking to become a certified internal auditor?

a. two years work experience in internal auditing or its equivalent.

b. Successful completion of a two-day examination.

c. A baccalaureate degree from an accredited college.

d. One year of supervisory experience.

139. For the highest degree of independence the director of internal auditing should report directly to:

a. the controller.

b. the audit committee of the board of directors.

c. the executive vice-president

d. the chief accountant.

140. Operational auditing does not focus on

a. efficiency

b. economy.

c. effectiveness.

d. compliance.

141. The operational auditors’ preliminary conclusions about problem areas are summarized as

a. the definition of purpose.

b. the audit program.

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 c. the preliminary survey.

d. the audit report.

142. In an audit in accordance with Philippine Standards on Auditing, the auditors must test compliance with those laws and
regulations that

a. have a direct and material effect on the financial statements.

b. have a direct and material effect on major government programs.

c. have a material direct or indirect effect on the financial statements.

d. have a material effect on major or nonmajor programs.

143. A primary purpose of operational auditing standards is to provide

a. a means of assurance that internal controls are operating effectively

b. aid to the independent auditor in conducting the audit of financial statements.

c. the results of internal examinations of financial and accounting matters to the company’s top-level management.

d. a measure of management performance in meeting organizational goals.

144. The primary purpose of the internal auditor’s evaluation of internal controls is to

a. determine if management has planned and implemented activities needed to attain goals and objectives.

b. determine the extent of tests of controls needed during field work.

c. identify areas for fraud investigation.]

d. determine if employees have incompatible duties that have compromised the control environment.

145. The internal auditing department provides information about control and quality of performance to

a. management and the board of directors.

b. a level in the organization sufficient to ensure acceptance of all recommendations.

c. outside agencies for regulatory and financial compliance.

d. any member of the organization upon request.

146. It is carried out by a contracted CPA who after adequate examination and investigation offers a professional opinion as to
whether the entity’s financial statements present fairly the results of operation and the financial condition of the
enterprise.

a. internal auditing

b. special investigation

c. independent auditing

d. government auditing

e. none of the above

147. A comprehensive and constructive examination of the organizational structure of a company, institution or branch of
government or any component thereof, its plans and objectives, its means of operation and its use of human and physical facilities
t reveal defects or irregularities and to indicate possible improvements is called

a. financial audit

b. management audit

c. government audit

d. balance sheet audit

e. internal audit

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148. The auditor is not responsible for the fairness of representations made in the audited financial statements unless he

a. makes suggestions on the form or content of the statements.

b. drafts the statements in whole or in part, based on management’s accounts and records.

c. issue an unqualified opinion

d. none of the above

149. The objectives of the Philippine Accountancy Act of 2004 are the following, except

a. standardization and regulation of accounting education.

b. examination for registration of certified public accountants.

c. supervision, control and regulation of the practice of accountancy.

d. integration of accountancy profession

150. The Philippine Accountancy Act of 2004 provides that all working papers made during an audit shall be the property of the
auditor. These working papers shall include the following, except

a. schedules of memoranda made by the CPA and his staff.

b. working papers prepared and submitted by the client.

c. excerpts of copies of documents furnished to the auditor.

d. reports submitted by the CPA to the client.

151. As society becomes more complex, there is an increased likelihood that unreliable information will be provided to decision
makers. Which of the following is a major source of information risk?

a. Remoteness of information

b. Voluminous data

c. Bias in motives of the provider.

d. Existence of complex exchange transactions

e. All of the above.

152. No matter how competent a CPA may be, his opinion on financial statement will be of little value to those who rely on him
unless he

a. issues an unqualified opinion.

b. maintains a program of continuing education.

c. serves his clients with professional concern for their best interests.

d. maintains his independence.

153. In “auditing” accounting data, the concern is with

a. determining whether recorded information properly reflects the economic events that occurred during the accounting
period.

b. determining if fraud has occurred.

c. determining if taxable income has been calculated correctly.

d. analyzing the financial information to be sure that it complies with government requirements.

154. When a company has changed auditors, according to the Professional Standards

a. the successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client
before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of
matters bearing on the integrity of management.

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 b. the predecessor must respond fully to all inquiries made by the successor auditor

c. the successor must discuss with the predecessor matters.

d. the successor may choose not to attempt any communication with the predecessor auditor.

155. which of the following statements is not true?

a. The criteria by which an auditor evaluates the information under audit may vary, depending on the information being
audited.

b. The criteria used by an external auditor to evaluate published financial statements are generally accepted accounting
principles.

c. The primary purpose of a compliance audit is to determine whether the overall statements are stated in accordance
with generally accepted accounting principles.]

d. information risk increases as business organization become larger.

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