1.

A proposed assurance engagement can be accepted when the practitioner’s preliminary knowledge about
the engagement circumstances indicate that relevant ethical requirements will be satisfied and
I. The subject matter of the engagement is appropriate.
II. The criteria to be used are suitable and are available to the intended users.
III. The practitioner has access to sufficient appropriate evidence to support the conclusion.
IV. There is a rational purpose for the engagement.
a. I, II and III only c. I, II, and IV only
b. I and II only d. I, II, III, and IV
2. The fields of practice of accountancy include all of the following except
a. public accountancy c. education/academe
b. commerce and industry d. consultancy

3. An assurance engagement should involve three separate parties: a practitioner, a responsible party and
intended users. Which of the following statements concerning these parties is incorrect?
a. The responsible party and intended users may be from different entities or the same entity.
b. An entity’s senior management (the responsible party) may engage a practitioner to perform an
assurance engagement on a particular aspect of the entity’s activities that is immediate responsibility of
a lower level of management (the intended user).
c. The term “practitioner” as used in the Framework for Assurance Engagements is broader than the term
“auditor” as used in PSAs and PSREs.
d. In an assertion-based engagement the responsible party is responsible for the subject matter
information (the assertion), and may be responsible for the subject matter.

4. In some assurance engagements, the evaluation or measurement of the subject matter is performed by the
responsible party, and the subject matter information is in the form of an assertion by the responsible that is
made available to intended users. These engagements are called
a. direct reporting engagements c. non-assurance engagements
b. assertion-based engagements d. recurring engagements

5. In an assurance engagement, the outcome of the evaluation or measurement of a subject matter against
criteria is called
a. subject matter information c. assurance
b. subject matter d. conclusion

6. Which of the following fundamental ethical principles requires a professional accountant to be

straightforward and honest in all professional and business relationships?
a. objectivity c. professional competence and due care
b. professional behavior d. integrity

7. An audit is conducted on the premise that management and, where appropriate, those charged with
governance, have acknowledged and understand that they have responsibilities that are fundamental to the
conduct of an audit in accordance with PSAs. Which of the following is NOT one of those responsibilities?
a. The preparation of the financial statements in accordance with relevant pronouncements issued by
the AASC.
b. The establishment and maintenance of an adequate internal control system that is necessary to
enable the preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
c. To provide the auditor with access to all information that is relevant to the preparation of the
financial statements such as records, documentation, and other matters.
d. To provide the auditor with unrestricted access to persons within the entity from which the auditor
determines it necessary to obtain audit evidence.

8. Which of the following statements concerning the practice of accountancy in commerce and industry is
incorrect?
a. A CPA is involved in decision making requiring professional knowledge in the science of
accounting, as well as the accounting aspects of finance and taxation.
b. A CPA represents his/her employer before government agencies on tax and other matters related
to accounting.
c. A CPA is employed in the position that requires the holder thereof to be a Certified Public
Accountant.
d. A CPA renders professional services as a Certified Public Accountant to more than one client on a
fee basis.

9. The principle of professional competence and due care imposes which of the following obligations on the
professional accountants?
a. To maintain professional knowledge and skill at the level required to ensure that clients or
employers receive competent professional service.
b. To refrain from disclosing confidential information obtained as a result of professional and business
relationships without proper and specific authority unless there is a legal or professional right or
duty to disclose.
c. To comply with relevant laws and regulations and avoid any situation that may bring discredit to the
profession.
d. Not to compromise professional or business judgment because of bias, conflict of interest or undue
influence of others.
10. The following matters are generally included in an auditor’s engagement letter, except
a. The factors to be considered in setting preliminary judgments about materiality.
b. The fact that because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of internal control, there is an unavoidable risk that even some material
misstatements may remain undiscovered.
c. The scope of the audit.
d. Management’s responsibility for the financial statements.

11. Which of the following activities should be performed by the auditor at the beginning of the current audit
engagement?
a. Perform procedures regarding the continuance of the client relationship and the specific audit
engagement.
b. Evaluate compliance with relevant ethical requirements, including independence.
c. Establish an understanding of the terms of the engagement.
d. All of the above.

12. In connection with the planning phase of an audit engagement, which of the following statements is always
correct?
a. Final staffing decisions must be made prior to completion of the planning stage.
b. Observation of inventory count should be performed at year-end.
c. A portion of the audit of a continuing audit client can be performed at interim dates.
d. An engagement should not be accepted after the client’s financial year-end.

13. Which of the following should be included in the audit plan?

a. The nature, timing and extent of planned risk assessment procedures, as determined under PSA
315 (Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and its Environment).
b. The nature, timing and extent of planned further audit procedures at the assertion level, as
determined under PSA 330 (The Auditor’s Responses to Assessed Risks).
c. All of the above.
d. None of the above.

14. An audit program should be designed for each individual audit and should incorporate steps and
procedures to
a. Detect and eliminate fraud of any type.
b. Gather sufficient amount of management information available.
c. Provide assurances that the objectives of the audit are satisfied.
d. Insure that only material items are audited.

15. In the planning stage of an audit engagement, the auditor is required to perform audit procedures to obtain
understanding of the entity and its environment, including its internal control. These procedures are called
a. risk assessment procedures c. tests of controls
b. substantive tests d. dual-purpose tests

16. The statements below describe the interrelationship of audit risk components. Which is false?
a. There is an inverse relationship between detection risk and the combined level of inherent and
control risk.
b. When inherent and control risks are high, the acceptable level of detection risk needs to be low to
reduce audit risk to an acceptably low level.
c. When inherent and control risks are low, an auditor can accept a higher detection risk and still
reduce audit risk to an acceptably low level.
d. The assessed level of inherent and control risks can be sufficiently low to eliminate the need for the
auditor to perform any substantive procedures.

17. Which of the following statements concerning analytical procedures is true?

a. Analytical procedures are more efficient, but not more effective, than tests of details of
transactions.
b. Analytical procedures used as risk assessment procedures use data aggregated at a high level.
c. Analytical procedures can replace tests of controls in gathering audit evidence to support the
assessed level of control risk.
d. Analytical procedures usually involve comparison of ratios developed from recorded amounts with
ratios developed by management.

18. Which of the following statements concerning audit risk and its components is incorrect?
a. Regardless of the assessed levels of inherent and control risks, the auditor should always perform
some substantive procedures for material account balances and classes of transactions.
b. The higher the assessment of inherent and control risks, the more evidence the auditor should
obtain from the performance of substantive procedures.
c. The assessed level of inherent risk need not be considered in determining the nature, timing and
extent of substantive procedures required to reduce audit risk to an acceptably low level.
d. After obtaining an understanding of the accounting and internal control systems, the auditor should
make a preliminary assessment of control risk, at the assertion level, for each material account
balance or class of transactions.
19. PSA 315 (Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity
and its Environment) requires the auditor to perform risk assessment procedures at
a. the financial statement level only
b. the assertion level only
c. the financial statement level and assertion level for classes of transactions, account balances and
disclosures.
d. either the financial statement or assertion level.

20. The auditor should obtain an understanding of the entity’s objectives and strategies, and those business
risks that may result in risks of material misstatement. Which of the following statements concerning the
entity’s business risk is incorrect?
a. Business risk is broader than the risk of material misstatement of the financial statements, though it
includes the latter.
b. An understanding of the business risks facing the entity increases the likelihood of identifying risks
of material misstatement.
c. The auditor has a responsibility to identify or assess all business risks.
d. Business risk may arise from the development of new products or services that may fail.

21. The auditor’s risk assessment procedures

a. by themselves, do not provide sufficient appropriate audit evidence on which to base the audit
opinion.
b. should not consider information obtained from the auditor’s previous experience with the entity.
c. are designed to detect material misstatements at the assertion level for classes of transactions,
account balances and disclosures.
d. are designed to test the effectiveness of the entity’s controls.

22. While obtaining an understanding of the client’s internal control system in the production cycle,
management stated that the sale of scrap was well controlled. Which of the following is the best audit
procedure to verify this assertion?
a. interviewing persons responsible for collecting and storing the scrap
b. comparing current revenue from scrap sales with that of prior periods
c. comparing the quantities of scrap expected from the production process with the quantities sold
d. comparing the results of a physical inventory of scrap on hand with perpetual inventory records

23. As used in PSA 230, it refers to the record of audit procedures performed, relevant audit evidence
obtained, and conclusions the auditor reached.
a. audit documentation c. audit planning memorandum
b. audit file d. management letter

24. Which of the following statements best describes the concept of sampling risk?
a. A randomly chosen sample may not be representative of the population as a whole on the
characteristic of interest.
b. The documents related to the chosen sample may not be available for inspection.
c. An auditor may fail to recognize errors in the documents examined for the chosen sample.
d. An auditor may select audit procedures that are not appropriate to achieve the specific objective.

25. Which of the following events most likely indicates the existence of related parties?
a. making a loan without scheduled terms for the repayment
b. discussing merger terms with a company that is a major competitor
c. selling real estate at a price that differs significantly from its book value
d. borrowing a large sum of money at a variable rate of interest

26. An entity’s management is responsible for the preparation and fair presentation of the financial statements.
Its responsibility includes the following, except
a. designing, implementing, and maintaining internal control relevant to the preparation and
presentation of financial statements
b. making accounting estimates that are reasonable in the circumstances
c. selecting and applying appropriate accounting policies
d. assessing the risks of material misstatement of the financial statements

27. Which of the following best describes why an independent auditor is asked to express an opinion on the fair
presentation of financial statements?
a. It is a customary courtesy that all shareholders receive an independent report on management’s
stewardship in managing the affairs of the business.
b. The opinion of an independent party is needed because a company may not be objective with
respect to its own financial statements.
c. It is difficult to prepare financial statements that present fairly a company’s financial position,
performance and cash flows without the expertise of an independent auditor.
d. It is management’s responsibility to seek available independent aid in the appraisal of the financial
information shown in its financial statements.

28. An independent auditor discovers that a payroll supervisor of the company being audited has
misappropriated P50,000. The company’s total assets and income before tax are P70 million and P15
 million, respectively. Assuming no other issues affect the report, the auditor’s report will most likely contain
a/an
a. unqualified opinion c. adverse opinion
b. disclaimer of opinion d. scope qualification

29. An auditor should design the written audit program so that

a. All material transactions will be selected for substantive testing.
b. Substantive test prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve the specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of transactions.

30. According to Section 9 (A) of the IRR, the Commission (PRC) upon the recommendation of the Board
(BOA), shall create an auditing standard setting body to be known as the
a. Auditing and Assurance Standards Council
b. Auditing Standards and Practices Council
c. Auditing Standards Board
d. Auditing Standards Council

31. The following documents shall be submitted by applicants for the CPA licensure examination, except
a. certificate of live birth in NSO security paper
b. marriage contract in NSO security paper for all married applicants
c. marriage contract in NSO security paper for all married female applicants
d. transcript of records with indication therein of date of graduation and Special Order number unless
it is not required.

32. Which of the following fundamental ethical principles prohibits association of professional accountants with
reports, returns, communications or other information that is believed to contain a materially false or
misleading statement?
a. integrity
b. objectivity
c. professional competence and due care
d. confidentiality

33. The following are components of internal control, except

a. control activities
b. entity’s risk assessment process
c. control environment
d. business risk

34. The auditor’s risk assessment procedures should always include the following except
a. inquiries of management and of others within the entity
b. analytical procedures
c. observation and inspection
d. substantive test procedures and test of controls

35. Internal controls should be designed to provide reasonable assurance that

a. management’s planning, organizing, and directing processes are properly evaluated
b. management’s plans have not been circumvented by employee collusion
c. material errors or fraud will be prevented, or detected and corrected, within a timely period by
employees in the course of performing their assigned duties
d. internal auditing department’s guidance and oversight of management’s performance is
accomplished economically and efficiently.

36. Criteria that are embodied in laws or regulations, or issued by authorized or recognized bodies of experts
that follow a transparent due process are called
a. suitable criteria
b. established criteria
c. specifically developed criteria
d. general criteria

37. The following are characteristics of a direct reporting assurance engagement, except
a. The subject matter information is in the form of an assertion by the responsible party that is made
available to the intended users.
b. The subject matter information is provided to the intended users in the assurance report.
c. The practitioner either directly performs the evaluation or measurement of the subject matter or
obtains a representation from the responsible party that has performed the evaluation or
measurement.
d. The representation of the responsible party that has performed the evaluation or measurement of
the subject matter is not available to the intended users.

38. What type of assurance engagement is involved if the practitioner expresses a negative form of
conclusion?
a. reasonable assurance
b. negative assurance
 c. assertion-based assurance
d. limited assurance

39. The auditor is required to obtain reasonable assurance about whether the financial statements are free
from material misstatement, whether due to fraud or error. In all cases when reasonable assurance cannot
be obtained, the auditor’s report should contain a/an
a. unqualified opinion
b. qualified or adverse opinion
c. qualified or disclaimer of opinion
d. disclaimer of opinion

40. The primary objective of procedures performed to obtain an understanding of internal control is to provide
the auditor with
a. Knowledge necessary for audit planning.
b. Evidential matter to use in assessing inherent risk.
c. A basis for modifying tests of controls.
d. An evaluation of the consistency of application of management’s policies.

41. Proper segregation of functional responsibilities to achieve effective internal control calls for separation of
the functions of
a. Authorization, execution, and payment
b. Authorization, recording, and custody
c. Custody, execution, and reporting
d. Authorization, payment and recording

42. Which of the following most likely would not be considered an inherent limitation of the potential
effectiveness of an entity’s internal control?
a. Incompatible duties
b. Management override
c. Faulty judgment
d. Collusion among employees

43. Which of the following best describes what is meant by the term generally accepted auditing standards?
a. Rules acknowledge by the accounting profession because of their universal application.
b. Pronouncements issued by the Auditing Standards and Practices Council.
c. Measures of the quality of the auditor’s performance.
d. Procedures to be used to gather evidence to support financial statements.

44. An auditor should design the written audit program so that

a. Most of the required procedures can be performed as interim work.
b. Inherent risk is assessed at a sufficiently low level.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of transactions.

45. The audit program usually cannot be finalized until the

a. Consideration of the entity’s internal control has been completed.
b. Engagement letter has been signed by the auditor and the client.
c. Reportable conditions have been communicated to the audit committee of the board of directors.
d. Search for unrecorded liabilities has been performed and documented.

46. An auditor’s communication of internal control related matters noted in an audit usually should be
addressed to the
a. Audit committee
b. Directors of internal auditing
c. Chief financial officer
d. Chief accounting officer

47. The development of constructive suggestions to a client for improvements in its internal control is
a. A task addressed by the auditor only during a special engagement.
b. A requirement as important as assessing control risk.
c. A requirement of the auditor’s consideration of internal control.
d. A desirable by-product of an audit engagement.

48. An auditor would least likely initiate a discussion with a client’s audit committee concerning
a. The methods used to account for significant unusual transactions.
b. The maximum peso amount of misstatements that could exist without causing the financial
statements to be materially misstated.
c. Indications of fraud and illegal acts committed by a corporate officer that were discovered by the
auditor.
d. Disagreements with management as to accounting principles that were resolved during the current
year’s audit.

49. An auditor is obligated to communicate a proposed audit adjustment to an entity’s audit committee if the
adjustment
a. Has not been recorded before the end of the auditor’s field work.
 b. Has a significant effect on the entity’s financial reporting process.
c. Is a recurring matter that was proposed to management in the prior year.
d. Related to an uncorrected misstatement was determined to be immaterial by management, and
pertained to the earliest period presented.
50. In determining whether transactions have been recorded, the direction of the audit testing should be from
the
a. General ledger balances.
b. Adjusted trial balance.
c. Original source documents.
d. General journal entries.
51. An auditor most likely would review an entity’s periodic accounting for the numerical sequence of shipping
documents and invoices to support management’s financial statement assertion of
a. Existence or occurrence
b. Rights and obligations
c. Valuation and measurement
d. Completeness

52. Which of the following might be detected by an auditor’s review of the client’s sales cut off?
a. Excessive goods returned for credit.
b. Unrecorded sales discounts.
c. Lapping of year-end accounts receivable.
d. Inflated sales for the year.

53. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the
subsequent year provide assurance about management’s assertion of
a. Presentation
b. Completeness
c. Rights
d. Existence
54. An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal
and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to
a. Identify unusually large purchases that should be investigated further.
b. Verify that cash disbursements were for goods actually received.
c. Determine that purchases were properly recorded.
d. Test whether payments were for goods actually ordered.

55. In auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s
assertion of
a. Existence or occurrence
b. Presentation and disclosure
c. Completeness
d. Valuation or allocation

56. Determining that proper amounts of depreciation are expensed provides assurance about management’s
assertion of valuation or allocation and
a. Presentation and disclosure
b. Completeness
c. Rights and obligations
d. Existence or occurrence
57. For a particular entity’s financial statements to be presented fairly in conformity with PFRS, it is not required
that the principles selected
a. Be appropriate in the circumstances for the particular entity.
b. Reflect transactions in a manner that presents the financial statements within a range of acceptable
limits.
c. Present information in the financial statements that is classified and summarized in a reasonable
manner.
d. Be applied on a basis consistent with those followed in the prior year.

58. An auditor’s responsibility to express an opinion on the financial statements is

a. Implicitly represented in the auditor’s standard report.
b. Explicitly represented in the opening paragraph of the auditor’s standard report.
c. Explicitly represented in the scope paragraph of the auditor’s standard report.
d. Explicitly represented in the opinion paragraph of the auditor’s standard report.

59. The primary reason for an audit by an independent, external auditing 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 the users as to the fairness of the financial statements.

60. An external auditor is conducting an audit of the financial statements of Carlos Corporation. The external
auditor is expected to
a. Express an opinion as to the fairness of Carlos Corporation’s financial statements.
 b. Express an opinion as to the attractiveness of Carlos for investment purposes and critique the
wisdom and legality of its business decisions.
c. Certify the correctness of Carlos’ financial statements.
d. Make a 100% examination of Carlos’ records.

61. Which of the following most likely impairs a CPA’s independence?

a. Owning stock in a mutual investment fund that owns stock in the CPA’s client.
b. Belonging to an investment club that holds stock in a client.
c. Serving as a co-fiduciary with a client bank with respect to a trust.
d. Auditing the insurance company that invests and manages contributions to the firm’s retirement
plan. These amounts are in a pooled separate account.

62. Which of the following statement concerning an accountant’s disclosure of confidential client data is
ordinarily correct?
a. Disclosure may be made to any government agency without subpoena.
b. Disclosure may be made to any party on consent of the client.
c. Disclosure may be made to comply with a BIR request.
d. Disclosure may be made to comply with generally accepted accounting standards.

63. According to the provisions of the Code of Ethics, a CPA

a. May not, upon leaving a firm, take any of the firm’s client files without permission.
b. Is not associated with unaudited interim reports issued by clients even if the CPA’s name is listed in
the report.
c. Cannot undertake the responsibility of supervising and evaluating the work of specialists.
d. May disclose confidential information about the client even without consent.

64. The PICPA Code of Ethics would be violated if a CPA accepted a fee for services and the fee was
a. Fixed by a public authority.
b. Based on a price quotation submitted in competitive bidding.
c. Based on results of judicial proceedings in a tax matter.
d. Payable after a specified finding was attained in an audit of financial statements.

65. Some account balances, such as those for pensions or leases, are the results of complex calculations. The
susceptibility to material misstatements in theses types of accounts is defined as
a. Audit risk
b. Detection risk
c. Sampling risk
d. Inherent risk
66. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment
about materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity’s annualized interim financial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.
67. Due professional care requires the auditor to exercise
a. Objective judgment
b. Independent integrity
c. Professional skepticism
d. Impartial conservatism
68. In an audit of financial statements, an auditor’s primary consideration regarding a control is whether it
a. Reflects management’s philosophy and operating cycle.
b. Affects management’s financial statement assertions.
c. Provides adequate safeguards over access to assets.
d. Enhances management’s decision making processes.
69. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that
a. Tests of controls may fail to indentify controls relevant to the assertions.
b. Material misstatements may exist in the financial statements.
c. Specified controls requiring segregation of duties may be circumvented by collusion.
d. Entity policies may be overridden by senior management.
70. The objective of performing analytical procedures in planning an audit is to identify the existence of
a. Unusual transactions and events.
b. Illegal acts that went undetected because of internal control weaknesses.
c. Related party transactions.
d. Recorded transactions that were not properly authorized.
71. Misstatements in the financial statements can arise from fraud and error. The distinguishing factor between
fraud and error is whether the underlying action that results in the misstatements of the financial statements
is
I. Intentional or unintentional
II. Rational or irrational
a. I only
b. II only
c. Both I and II
d. Neither I nor II
72. Error includes
a. Engaging in complex transactions that are structured to misrepresent the financial position or
financial performance of the entity.
b. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial
statements.
c. An incorrect accounting estimate arising from oversight or misinterpretation of facts.
d. Intentional misapplication of accounting policies relating to amounts, classification, manner of
presentation, or disclosure.
73. The primary responsibility for the prevention and detection of fraud rests with
a. Those charged with governance of the entity
b. Management of the entity
c. Both those charged with governance of the entity and management
d. The auditor
74. Which of the following statements best describes an auditor’s responsibility regarding misstatements?
a. An auditor should obtain reasonable assurance that the financial statements taken as a whole are
free from material misstatement, whether caused by fraud or error.
b. An auditor should obtain absolute assurance that material misstatements in the financial
statements will be detected.
c. An auditor is responsible to detect material errors but has no responsibility to detect material fraud
that is concealed through employee collusion or management override of internal control.
d. An auditor’s failure to detect a material misstatement resulting from fraud is an indication of
noncompliance with the requirements of the PSAs.