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1. Which of the following factors most likely would lead a CPA to conclude
that a potential audit engagement should not be accepted?
A. There are significant related party transactions that management
claims occurred in the ordinary course of business.
B. Internal control activities requiring the segregation of duties are
subject to management override.
C. Management continues to employ an inefficient system of information
technology to record financial transactions.
D. It is unlikely that sufficient evidence is available to support an
opinion on the financial statements.

2. The element of the audit planning process most likely to be agreed upon
with the client before implementation of the audit strategy is the
determination of the
A. Timing of inventory observation procedures to be performed.
B. Evidence to be gathered to provide a sufficient basis for the
auditor's opinion.
C. Procedures to be undertaken to discover litigation, claims, and
assessments.
D. Pending legal matters to be included in the inquiry of the client's
attorney.

3. Having evaluated inherent risk and control risk, the auditor determines
detection risk
A. As the complement of overall audit risk.
B. By performing substantive audit tests.
C. As a product of further study of the business and industry and
application of analytical procedures.
D. At a level that equates the joint probability of inherent risk,
control risk, and detection risk with overall audit risk.

4. An auditor compares 2014 revenues and expenses with those of the prior
year and investigates all changes exceeding 10%. By this procedure the
auditor would be most likely to learn that
A. An increase in property tax rates has not been recognized in the
client's accrual.
B. The 2014 provision for uncollectible accounts is inadequate, because
of worsening economic conditions.
C. Fourth quarter payroll taxes were not paid.
D. The client changed its capitalization policy for small tools in 2014.

The marketing department for a major retailer assigns separate product

managers for each product line. Product managers are responsible for ordering
products and determining retail pricing. Each product manager’s purchasing
budget is set by the marketing manager. Products are delivered to a central
distribution center where goods are segregated for distribution to the
company’s 52 department stores. Because receipts are recorded at the
distribution center, the company does not maintain a receiving function at
each store. Product managers are evaluated on a combination of sales and gross
profit generated from their product lines. Many products are seasonal and
individual store managers can require that seasonal products be removed to
make space for the next season’s products.

5. Which of the following is a control deficiency in this situation?

A. The store manager can require items to be removed, thus affecting the
potential performance evaluation of individual product managers.
B. The product manager negotiates the purchase price and sets the
selling price.
C. Evaluating product managers by total gross profit generated by
product line will lead to dysfunctional behavior.
D. There is no receiving function located at individual stores.

6. Requests for purchases beyond those initially budgeted must be approved

by the marketing manager. This procedure
I. Should provide for the most efficient allocation of scarce
organizational resources.
II. Is a detective control procedure.
III. Is unnecessary because each product manager is evaluated on profit
generated.
A. I only.
B. III only.
C. II and III only.
D. I, II, and III.
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7. Who is most likely to perpetrate fraudulent financial reporting?

A. Members of the board of directors
B. Production employees
C. Management of the company
D. Internal auditors

8. Auditors may identify conditions during fieldwork that change or support

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

9. The risk of not detecting material misstatement resulting from fraud is

greater than the risk of not detecting a material misstatement arising
from error because
A. The auditor designs only procedures to detect material error but no
procedures are designed to detect material fraud.
B. Fraud ordinarily involves acts designed to conceal it, such as
collusion, forgery, or deliberate failure to record transactions.
C. The professional standards do not require the auditor to discover
information that is indicative of fraud.
 D. It is the responsibility of the management to detect fraud and the
auditor's responsibility is confined only to the detection of
material errors.

10. Which of the following is most likely to be considered a risk factor

relating to fraudulent financial reporting?
A. Domination of management by top executives.
B. Large amount of cash processed.
C. Negative cash flows from operations.
D. Small high-peso inventory items.
11. The most common technique used by management to misstate financial
information is
A. Overstatement of expenses.
B. Improper revenue recognition.
C. Understatement of liabilities.
D. Understatement of assets.

12. In order to achieve the objectives of the accountancy profession,

professional accountants have to observe a number of prerequisites or
fundamental principles. The fundamental principles include the
following, except
A. Objectivity
B. Professional Competence and due Care
C. Technical Standards
D. Confidence

13. If a member of the assurance team, or their immediate family member

receives, by way of, for example, an inheritance, gift or, as a result of
a merger, a direct financial interest or a material indirect financial
interest in the assurance client, a self-interest threat would be
created. The following safeguards should be applied to eliminate the
threat or reduce it to an acceptable level:
A. Disposing of the financial interest at the earliest practical date.
B. Removing the member of the assurance team from the assurance
engagement.
C. Either a or b.
D. Neither a nor b.

14. The following statements pertain to the generally accepted rules used
when writing numbers. Which is incorrect?
A. Numbers used in the beginning of a sentence should be written as
words.
B. Numbers one (1) to nine (9) should be written as numerals while
numbers having more than one digit should be written as words.
C. When writing numbers next to each other, you should use words for one
of them and a numeral for the other.
D. Whether to use a numeral or to spell out a number as a word is a
matter of style but there are generally accepted rules.

15. This Philippine Standard on Auditing (PSA) deals with the auditor's
responsibility to apply the concept of materiality in planning and
performing an audit of financial statements.
 A. PSA 300
B. PSA 315
C. PSA 320
D. PSA 330

16. This Philippine Standard on Auditing (PSA) explains what constitutes

audit evidence in an audit of financial statements, and deals with the
auditor's responsibility to design and perform audit procedures to obtain
sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the auditor's opinion
A. PSA 230
B. PSA 520
C. PSA 500
D. PSA 300

17. An auditor should perform alternative procedures to substantiate the

existence of accounts receivable when
A. No reply to a positive confirmation request is received.
B. No reply to a negative confirmation request is received.
C. Collectibility of the receivables is in doubt.
D. Pledging of the receivables is probable.

18. When the auditor decides to confirm accounts receivable balances rather
than individual invoices, it most likely would be beneficial to include
with the confirmations
A. Copies of the client's shipping documents that support the account
balances.
B. Lists of the customer's recent payments that the client has already
recorded.
C. Client-prepared statements of account that show the details of the
account balances.
D. Copies of the customer's purchase orders that support the account
balances.

19. Which of the following is the best example of a substantive test?

A. Examining a sample of cash disbursements to test whether expenses
have been properly approved.
B. Confirmation of balances of accounts receivable.
C. Comparisons of signatures on checks to a list of authorized signers.
D. Flowcharting of the client's cash receipts system.

20. Which of the following is the best example of a substantive test?

E. Examining a sample of cash disbursements to test whether expenses
have been properly approved.
F. Confirmation of balances of accounts receivable.
G. Comparisons of signatures on checks to a list of authorized signers.
H. Flowcharting of the client's cash receipts system.

21. The following statements pertain to evidential matters:

I. Appropriate evidence supporting management's assertions should be
convincing rather than merely persuasive.
 II. Effective internal control contributes little to the reliability of
the evidence created within the entity.
III. The cost of obtaining evidence is not an important consideration to
an auditor in deciding what evidence should be obtained.
IV. A client's accounting data cannot be considered sufficient audit
evidence to support the financial statements.
A. All statements are incorrect.
B. Two (2) statements are incorrect.
C. One (1) statement is incorrect.
D. Three (3) statements are incorrect.

22. Which of the following is a general principle relating to the reliability

of audit evidence?
A. Audit evidence obtained from indirect sources rather than directly is
more reliable than evidence obtained directly by the auditor.
B. Audit evidence provided by copies is more reliable than provided by
facsimiles.
C. Audit evidence obtained from knowledgeable independent sources
outside the client company is more reliable than evidence obtained
from non-independent sources.
D. Audit evidence provided by original documents is more reliable than
audit evidence generated through a system of effective controls.

23. Which of the following types of audit evidence is the most persuasive?
A. Pre-numbered client purchase order forms.
B. Client worksheets supporting cost allocations.
C. Bank statements obtained from the client.
D. Client representation letter.

24. Which of the following types of audit evidence is the least persuasive?
A. Pre-numbered purchase order forms.
B. Bank statements obtained from the client.
C. Test counts of inventory performed by the auditor.
D. Correspondence from the client's attorney about litigation.

25. Choose the sentence that uses complement or compliment correctly.

A. After the least hiring phase, we finally had a full compliment of
customer service representatives ready to answer calls.
B. It always seemed like Mr. Larken complemented the boys in the class
for their hard work more than the girls.
C. Emman beamed when his peers complimented him on his performance in
the school talent show.
D. The complements she received did not make Chelsea feel better about
her defeat in the golf tournament.

26. Which of the following do not facilitate globalization?

A. Improvements in communications
B. Barriers to trade and investment
C. Looser immigration controls
D. Removal of controls on movement of capital across borders

27. Which of the following is not a key corporate factor driving the need for
better corporate governance?
A. the growth in shareholder activism
B. the requirement to access lower-cost debt and equity finance
 C. higher levels of individual taxation dissuading potential
shareholders
D. increasing competition making high levels of performance harder to
achieve

28. Applying your knowledge of the elements of assurance engagements,

determine which of the following are considered as non-assurance
engagements:
A. Agreed-upon procedures in connection with a planned acquisition of a
competitor company
B. Review and expression of opinion on the efficiency and effectiveness
of a school's enrollment system
C. Reporting on the adherence of a company to anti-pollution rules and
regulations of a country
D. All of the answers are non-assurance engagements

29. Mai, CPA discussed selected elements of the overall audit plan and
certain audit procedures with the audit committee, management and staff
of Dawn Traders. This move by the auditor has the following benefits,
except:
A. The overall audit plan and the audit program becomes a shared
responsibility between the auditor and the client's management.
B. The audit can be performed with improved effectiveness and
efficiency.
C. Coordination of audit procedures with work of the entity's personnel
can be initiated.
D. Improved business relationship between the client and the auditor is
established.

30. Which one of the following might not be a signal of management's

potential lack of integrity?
A. Prior criminal conviction of an assembly line foreman
B. Frequent turnover of key internal audit personnel
C. Frequent disagreements with previous auditors
D. Frequent turnover of key financial personnel

31. Which of the following would be least likely to be included in an

auditor's tests of controls?
A. Inspection
B. Inquiry
C. Observation
D. Confirmation

What audit procedure is extensively used throughout the audit?

A. inquiry
B. confirmation
C. inspection
D. reperformance

32. Inherent risk is ___________ related to detection risk and ____________

related to the amount of audit evidence.
 A. directly, inversely
B. directly, directly
C. inversely, inversely
D. inversely, directly

33. Which of the following would most likely heighten an auditor’s concern
about the risk of intentional manipulation of financial statements?
A. Turnover of senior accounting personnel is low
B. Insiders recently purchased additional shares of the entity’s stock
C. Management places substantial emphasis on meeting earnings
projections
D. The rate of change in the entity’s industry is low

34. Which of the following least likely affect the form and content of the
overall audit plan?
A. Complexity of the audit engagement
B. Methodology and technology used by the auditor
C. The entity’s form of business organization
D. The size of the entity

35. The auditor faces a risk that the examination will not detect material
misstatements in the financial statements. In regard to minimizing this
risk, the auditor primarily relies on
A. Substantive tests
B. Tests of controls
C. Internal control
D. Statistical analysis