AT250MCQ

ASSURANCE SERVICES

1. Which of the following statements best describes assurance services?

A. Independent professional services that are intended to enhance the
credibility of information to meet the needs of an intended user.
B. Services designed to express an opinion on the fairness of historical
financial statements based on the results of an audit.
C. The preparation of financial statements or the collection, classification, and
summarization of other financial information.
D. Services designed for the improvement of operations, resulting in better
outcomes.

2. Which of the following is not an assurance service?

A. Examination of prospective financial information
B. Audit of historical financial statements
C. Review of financial statements
D. Compilation of financial information

3. Suitable criteria are required for reasonably consistent evaluation or

measurement of the subject matter of an assurance engagement. Which of
the following statements concerning the characteristics of suitable criteria is
correct?
A. Reliable criteria contribute to conclusions that are clear, comprehensive,
and not subject to significantly different interpretations.
B. Relevant criteria allow reasonably consistent evaluation or measurement of
the subject matter including, where relevant, presentation and disclosure,
when used in similar circumstances by similarly qualified practitioners.
C. Neutral criteria contribute to conclusions that are free from bias.
D. Criteria are sufficiently complete when they contribute to conclusions that
are clear, comprehensive, and not subject to different interpretations.

4. In an assurance engagement, the outcome of the evaluation or measurement

of a subject matter against criteria is called
A. Subject matter information
B. Subject matter
C. Assurance
D. Conclusion

5. 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 party that is made
available to intended users. These engagements are called
A. Direct reporting engagements
B. Assertion-based engagements
C. Non-assurance engagements
D. Recurring engagements

6. What type of assurance engagement is involved when the practitioner

expresses a positive form of conclusion?
A. Limited assurance engagement
B. Positive assurance engagement
C. Reasonable assurance engagement
D. Absolute assurance engagement

7. What type of assurance engagement is involved when the practitioner

expresses a negative form of conclusion?
A. Reasonable assurance engagement
B. Negative assurance engagement
C. Assertion-based assurance engagement
D. Limited assurance engagement
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8. Which of the following statements is true concerning evidence in an assurance

engagement?
A. Sufficiency is the measure of the quantity of evidence.
B. Appropriateness is the measure of the quality of evidence, that is, its
reliability and persuasiveness.
C. The reliability of evidence is influenced not by its nature but by its source.
D. Obtaining more evidence may compensate for its poor quality.

9. Assurance engagement risk is the risk

A. That the practitioner expresses an inappropriate conclusion when the
subject matter information is materially misstated.
B. Of expressing an inappropriate conclusion when the subject matter
information is not materially misstated.
C. Through loss from litigation, adverse publicity, or other events arising in
connection with a subject matter reported on.
D. Of expressing an inappropriate conclusion when the subject matter
information is either materially misstated or not materially misstated.

10. Reducing assurance engagement risk to zero is very rarely attainable or cost
beneficial as a result of the following factors, except
A. The use of selective testing.
B. The fact that much of the evidence available to the practitioner is
persuasive rather than conclusive.
C. The practitioner may not have the required assurance knowledge and skills
to gather and evaluate evidence.
D. The use of judgment in gathering and evaluating evidence and forming
conclusions based on that evidence.

11. The Philippine Framework for Assurance Engagements

A. Contains basic principles, essential procedures, and related guidance for the
performance of assurance engagements.
B. Defines and describes the elements and objectives of an assurance
engagement, and identifies engagements to which PSAs, PSREs, and PSAEs
apply.
C. Provides a frame of reference for CPAs in public practice when performing
audits, reviews, and compilations of historical financial information.
D. Establishes standards and provides procedural requirements for the
performance of assurance engagements.

12. After accepting an assurance engagement, a practitioner is not allowed to

change the engagement to a non-assurance engagement, or from a reasonable
assurance engagement to a limited assurance engagement, except when there
is reasonable justification for the change. Which of the following ordinarily will
justify a request for a change in the engagement?
I. A change in circumstances that affects the intended users’ requirements.
II. A misunderstanding concerning the nature of the engagement.
A. I only C. Both I and II
B. II only D. Neither I nor II

AUDITING AND RELATED SERVICES

13. PSRE 2400 (Engagements to Review Financial Statements), as amended by the

AASC in February 2008, applies to
A. Reviews of any historical financial information of an audit client.
B. Reviews of any historical financial information by a practitioner other than
the entity’s auditor.
C. Reviews of historical financial or other information by a practitioner other
than the entity’s auditor.
D. Reviews of historical financial or other information of an audit client.
14. When performing a compilation engagement, the accountant is required to

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A. Assess internal controls.

B. Make inquiries of management to assess the reliability and completeness of
the information provided.
C. Verify matters and explanations.
D. Obtain a general knowledge of the business and operations of the entity.

15. Inquiries and analytical procedures ordinarily form the basis for which type of
engagement?
A. Agreed-upon procedures.
B. Audit.
C. Examination.
D. Review.

16. Independence is not a requirement for which of the following engagements?

Compilation Review Agreed-upon Procedures
A. No Yes No
B. No No No
C. Yes No Yes
D. Yes Yes Yes

17. A practitioner should accept an assurance engagement only if

A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended users.
C. The practitioner’s conclusion is to be contained in a written report.
D. The subject matter is the responsibility of either the intended users or the
practitioner.

18. A practitioner is associated with financial information when

I. The practitioner attaches a report to that financial information.
II. The practitioner consents to the use of his/her name in a professional
connection.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

19. The auditor is required to comply with all PSAs relevant to the audit of an
entity’s financial statements. A PSA is relevant to the audit when
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist.
A. I only C. Either I or II
B. II only D. Both I and II

20. The overall objectives of the auditor in conducting an audit of financial

statements are
I. To obtain reasonable assurance about whether the financial statements as
a whole are free from material misstatement, whether caused by fraud or
error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence.
IV. To detect all misstatements, whether due to fraud or error.
A. I and II only
B. II and IV only
C. I, II, and III only
D. I, II, III, and IV

21. The auditor is required to maintain professional skepticism throughout the

audit. Which of the following statements concerning professional skepticism is
false?
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A. A belief that management and those charged with governance are honest
and have integrity relieves the auditor of the need to maintain professional
skepticism.
B. Maintaining professional skepticism throughout the audit reduces the risk of
using inappropriate assumptions in determining the nature, timing, and
extent of the audit procedures and evaluating the results thereof.
C. Professional skepticism is necessary to the critical assessment of audit
evidence.
D. Professional skepticism is an attitude that includes questioning
contradictory audit evidence obtained.

22. Which of the following best describes the reason why independent auditors
report on financial statements?
A. A management fraud may exist and it is more likely to be detected by
independent auditors.
B. Different interests may exist between the company preparing the
statements and the persons using the statements.
C. A misstatement of account balances may exist and is generally corrected as
the result of the independent auditors’ work.
D. Poorly designed internal control may be in existence.

23. Which of the following professionals has primary responsibility for the
performance of an audit?
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.

24. What is the proper organizational role of internal auditing?

A. To serve as an independent, objective assurance and consulting activity
that adds value to operations.
B. To assist the external auditor in order to reduce external audit fees.
C. To perform studies to assist in the attainment of more efficient operations.
D. To serve as the investigative arm of the audit committee of the board of
directors.

25. Operational audits generally have been conducted by internal and COA
auditors, but may be performed by certified public accountants. A primary
purpose of an operational audit is to provide
A. A measure of management performance in meeting organizational goals.
B. The results of internal examinations of financial and accounting matters to a
company’s top-level management.
C. Aid to the independent auditor, who is conducting the examination of the
financial statements.
D. A means of assurance that internal accounting controls are functioning as
planned.

26. Governmental auditing often extends beyond examinations leading to the

expression of opinion on the fairness of financial presentation and includes
audits of efficiency, economy, effectiveness, and also
A. Accuracy.
B. Evaluation.
C. Compliance.
D. Internal control.

27. Which of the following terms best describes the audit of a taxpayer’s return by
a BIR auditor?
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit.

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28. Which of the following statements concerning consulting services is false?

A. The performance of consulting services for audit clients does not, in and of
itself, impair the auditor’s independence.
B. Consulting services differ fundamentally from the CPA’s function of attesting
to the assertions of other parties.
C. Consulting services ordinarily involve external reporting.
D. Most CPAs, including those who provide audit and tax services, also provide
consulting services to their clients.

29. Which of the following is the most appropriate action to be taken by a CPA who
has been asked to perform a consulting services engagement concerning the
analysis of a potential merger if he/she has little experience with the industry
involved?
A. Accept the engagement but he/she should conduct research or consult with
others to obtain sufficient competence.
B. Decline the engagement because he/she lacks sufficient knowledge.
C. Accept the engagement and issue a report that contains his/her opinion on
the achievability of the results of the merger.
D. Accept the engagement and perform it in accordance with Philippine
Standards on Auditing (PSAs).

30. An objective of a performance audit is to determine whether an entity’s

A. Operational information is in accordance with government auditing
standards.
B. Specific operating units are functioning economically and efficiently.
C. Financial statements present fairly the results of operations.
D. Internal control is adequately operating as designed.

31. Internal auditors should review the means of physically safeguarding assets
from losses arising from
A. Exposure to the elements.
B. Underusage of physical facilities.
C. Misapplication of accounting principles.
D. Procedures that are not cost justified.

32. The internal auditing department’s responsibility for deterring fraud is to

A. Establish an effective internal control system.
B. Maintain internal control.
C. Examine and evaluate the system of internal control.
D. Exercise operating authority over fraud prevention activities.

33. Internal auditors review the adequacy of the company’s internal control
system primarily to
A. Help determine the nature, timing, and extent of tests necessary to achieve
audit objectives.
B. Determine whether the internal control system provides reasonable
assurance that the company’s objectives and goals are met efficiently and
economically.
C. Ensure that material weaknesses in the system of internal control are
corrected.
D. Determine whether the internal control system ensures that financial
statements are fairly presented.

34. Which of the following services, if any, may a practitioner who is not
independent provide?
A. Compilations but not reviews.
B. Reviews but not compilations.
C. Reviews but not financial statement audits.
D. Agreed-upon procedures but not compilations.

THE ACCOUNTANCY PROFESSION

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35. The members of the Professional Regulatory Board of Accountancy shall be

appointed by the
A. Philippine Institute of CPAs (PICPA).
B. Professional Regulation Commission (PRC).
C. President of the Philippines.
D. Association of CPAs in Public Practice (ACPAPP).

36. The following statements relate to the submission of nominations to the Board
of Accountancy. Which is correct?
A. The Accredited National Professional Organization of CPAs (APO) shall
submit its nominations to the president of the Philippines not later than
sixty (60) days prior to the expiry of the term of an incumbent chairman or
member.
B. The APO shall submit its nominations to the PRC not later than thirty (30)
days prior to the expiry of the term of an incumbent chairman or member.
C. If the APO fails to submit its own nominee(s) to the PRC within the required
period, the PRC in consultation with the Board of Accountancy shall submit
to the president of the Philippines a list of five (5) nominees for each
position.
D. There should be adequate documentation to show the qualifications and
primary field of professional activity of each nominee.

37. The following statements relate to the term of office of the chairman and
members of the Board of Accountancy (BOA). Which is false?
A. The chairman and members of the BOA shall hold office for a term of three
(3) years.
B. Any vacancy occurring within the term of a member shall be filled up for the
unexpired portion of the term only.
C. No person who has served two successive complete terms as chairman or
member shall be eligible for reappointment until the lapse of two (2) years.
D. Appointment to fill up an unexpired term is not to be considered as a
complete term.

38. The Board of Accountancy has the power to conduct an oversight into the
quality of audits of financial statements through a review of the quality control
measures instituted by auditors in order to ensure compliance with the
accounting and auditing standards and practices. This power of the BOA is
called
A. Quality assurance review C. Appraisal
B. Peer review D. Quality control

39. The Board of Accountancy shall submit to the PRC the ratings obtained by each
candidate within _____ days after the examination, unless extended for just
cause.
A. 10 C. 2
B. 5 D. 3

40. Which of the following shall be issued to examinees who pass the CPA licensure
examination?
A. Certificate of registration and death certificate.
B. Professional identification card and warrant of arrest.
C. Certificate of registration and professional identification card.
D. Warrant of arrest and death certificate.

41. Which of the following statements concerning the issuance of Certificates of

Registration and Professional Identification Cards to successful examinees is
correct?
A. The Certificate of Registration issued to successful examinees is renewable
every three (3) years.

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B. The Professional Identification Card issued to successful examinees shall

remain in full force and effect until withdrawn, suspended or revoked in
accordance with RA 9298.
C. The BOA shall not register and issue a Certificate of Registration and
Professional Identification Card to any successful examinee of unsound
mind.
D. The BOA may, after the expiration of three (3) years from the date of
revocation of a Certificate of Registration, reinstate the validity of a revoked
Certificate of Registration.

42. Which of the following statements concerning ownership of working papers is

incorrect?
A. All working papers made by a CPA and his/her staff in the course of an
examination remain the property of such CPA in the absence of a written
agreement between the CPA and the client to the contrary.
B. Working papers include schedules and memoranda prepared and submitted
by the client of the CPA.
C. Working papers include reports submitted by a CPA to his/her client.
D. Working papers shall be treated confidential and privileged unless such
documents are required to be produced through subpoena issued by any
court, tribunal, or government regulatory or administrative body.

43. Any person who shall violate any of the provisions of the Accountancy Act or
any of its implementing rules and regulations promulgated by the Board of
Accountancy subject to the approval of the PRC, shall, upon conviction, be
punished by
A. A fine of not more than P50,000.
B. Imprisonment for a period not exceeding two years.
C. A fine of not less than P50,000 or by imprisonment for a period not
exceeding two years or both.
D. Lethal injection.

44. Which of the following statements concerning the use of firm or partnership
name is incorrect?
A. In the case of an individual CPA, he/she shall do business under his/her
registered name with the BOA and the PRC and as printed in his/her CPA
certificate (for example, Juan Puruntong, CPA).
B. In the case of a firm, it shall do business under its duly registered and
authorized firm name appearing in the registration documents issued by the
Department of Trade and Industry (DTI) and other government offices and
such firm name shall include the real name of the sole proprietor as printed
in his/her CPA certificate (for example, Arnulfo Gumamela and Associates).
C. In the case of a registered partnership, it shall do business under its name
as indicated in its current Articles of Partnership and Certificate of
Registration issued by the Securities and Exchange Commission (SEC) (for
example, Tanya, Sam, and Jervi, CPAs).
D. A CPA shall practice only under an individual, firm, or partnership name in
accordance with Philippine laws and shall not include any fictitious name
but may indicate specialization.

45. A partner surviving the death or withdrawal of all the other partners in a
partnership may continue to practice under the partnership name for a period
of not more than _____ years after becoming a sole proprietor.
A. 1 C. 3
B. 2 D. 4

46. The death or disability of an individual CPA and/or the dissolution and
liquidation of a firm or partnership of CPAs shall be reported to the BOA not
later than _____ days from the date of such death, dissolution or liquidation.
A. 15 C. 60
B. 30 D. 90

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47. The following statements relate to CPE credit units. Which is incorrect?
A. The total CPE credit units for registered accounting professionals shall be
sixty (60) credit units for three (3) years, provided that a minimum of fifteen
(15) credit units shall be earned in each year.
B. Any excess credit units in one year may be carried over to the succeeding
years within the three-year period.
C. Excess credit units earned may be carried over to the next three-year
period including credit units earned for doctoral and master’s degrees.
D. One credit hour of CPE program, activity or source shall be equivalent to
one (1) credit unit.

48. Which of the following statements concerning a CPA’s disclosure of confidential

client information is ordinarily correct?
A. Disclosure may be made to any party on consent of the client.
B. Disclosure should not be made even if such disclosure will protect the CPA’s
professional interests in legal proceedings.
C. Disclosure should be made only if there is a legal or professional duty to
make the disclosure.
D. Disclosure may be made to any government agency without subpoena.

49. Listed below are names of four CPA firms and pertinent facts relative to each
firm. Unless otherwise indicated, the individuals named are CPAs and partners,
and there are no other partners. Which is a violation of the Implementing
Rules and Regulations of RA 9298?
A. Tin, Ton and Tan, CPAs (Tin died about five years ago; Ton and Tan are
continuing the firm.)
B. Pol and Bon, CPAs (The name of Cua, a third partner, is omitted from the
partnership name.)
C. Joni and Jona, CPAs (Joni died about three years ago; Jona is continuing the
firm as a sole proprietor.)
D. Elias and Co., CPAs (The firm has ten other partners who are all CPAs).

50. The following statements relate to some of the provisions of RA 9298. Which is
correct?
A. Audit working papers are generally the property of the company whose
financial statements were audited.
B. After three (3) years, subject to certain conditions, the Board of
Accountancy may order the reinstatement of a CPA whose certificate of
registration has been revoked.
C. The penal provision (Sec. 36) of RA 9298 applies only to the violation of any
of the provisions of RA 9298 because its Implementing Rules and
Regulations are unenforceable.
D. It shall be the primary duty of the PRC and the BOA to effectively enforce
the provisions of RA 9298.

THE CPA’S PROFESSIONAL RESPONSIBILITIES

51. Which of the following statements best explains why the CPA profession has
found it essential to establish ethical standards and means for ensuring their
observance?
A. Vigorous enforcement of an established code of ethics is the best way to
prevent unscrupulous acts.
B. Ethical standards that emphasize excellence in performance over material
rewards establish a reputation for competence and character.
C. A distinguishing mark of a profession is its acceptance of responsibility to
the public.
D. A requirement for a profession is to establish ethical standards that stress
primarily a responsibility to clients and colleagues.

52. Which part of the Code establishes the fundamental principles of professional
ethics for professional accountants and provides a conceptual framework that

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professional accountants shall apply to identify threats to compliance with the

fundamental principles, evaluate the significance of the threats identified, and
apply safeguards, when necessary, to eliminate the threats or reduce them to
an acceptable level?
A. Part A.
B. Part B.
C. Part C.
D. Part D.

53. The threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures from the client is known
as
A. Intimidation threat
B. Familiarity threat.
C. Self-interest threat.
D. Advocacy threat.

54. Which of the following will not create self-interest threat for a professional
accountant in public practice?
A. The possibility of losing a significant client.
B. Direct financial interest in the assurance client.
C. Undue dependence on total fees from a client.
D. Preparing the original data used to generate records that are the subject
matter of the assurance engagement.

55. Familiarity threat could be created under the following circumstances except
A. A professional accountant accepting gifts from a client whose value is
inconsequential or trivial.
B. Senior personnel having a long association with the assurance client.
C. A director or officer of the client or an employee in a position to exert
significant influence over the subject matter of the engagement having
recently served as the engagement partner.
D. A member of the engagement team having a close or immediate family
member who is a director or officer of the client.

56. This threat to independence occurs when a member of the assurance team has
recently performed services for an assurance client that directly affect the
subject matter information of the assurance engagement (e.g., valuation
services).
A. Self-review threat.
B. Advocacy threat.
C. Self-interest threat.
D. Familiarity threat.

57. Which of the following circumstances may create advocacy threat for a
professional accountant in public practice?
A. The firm promoting shares in an audit client.
B. A firm issuing an assurance report on the effectiveness of the operation of
financial systems after designing or implementing the systems.
C. A firm being threatened with dismissal from a client engagement.
D. A firm being concerned about the possibility of losing a significant client.

58. The following circumstances may create intimidation threats, except

A. Being threatened with dismissal or replacement in related to a client
engagement.
B. Being pressured to reduce inappropriately the extent of work performed in
order to reduce fees.
C. Being threatened with litigation.
D. A member of the assurance team being, or having recently been, a director
or officer of the client.

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59. Which of the following is an example of engagement-specific safeguards in the

work environment?
A. Advising partners and professional staff of those assurance clients and
related entities from which they must be independent.
B. Disclosing to those charged with governance of the client the nature of
service provided and extent of fees charged.
C. A disciplinary mechanism to promote compliance with the firm’s policies
and procedures.
D. Published policies and procedures to encourage and empower staff to
communicate to senior levels within the firm any issue relating to
compliance with the fundamental principles that concerns them.

60. According to Section 240 of the Code of Ethics, fees charged for assurance
engagements should be a fair reflection of the value of the work involved. In
determining professional fees, the following should be taken into account,
except
A. The time necessarily occupied by each person engaged on the work.
B. The outcome or result of a transaction or the result of the work performed.
C. The skill and knowledge required for the type of work involved.
D. The level of training and experience of the persons necessarily engaged on
the work.

61. In the case of audit engagements, it is in the public interest and, therefore,
required by the Code that members of audit teams, firms and network firms
shall be independent of audit clients. Independence requires
A. Independence of mind only.
B. Independence in appearance only.
C. Both independence of mind and independence in appearance
D. Either independence of mind or independence in appearance

62. When the professional accountant determines that appropriate safeguards are
not available or cannot be applied to eliminate the threats to independence or
reduce them to an acceptable level, the professional accountant shall
I. Eliminate the circumstance or relationship creating the threats.
II. Decline or terminate the audit engagement.
A. I only
B. II only
C. Neither I nor II
D. Either I or II

63. Financial interests may be held through an intermediary (for example, a

collective investment vehicle, estate or trust). When control over the
investment vehicle or the ability to influence investment decisions exists, the
code defines that financial interest to be a/an
A. Direct financial interest.
B. Material direct financial interest.
C. Indirect financial interest.
D. Material indirect financial interest.

64. Holding a financial interest in an audit client may create a self-interest threat.
The existence and significance of any threat created depends on
I. The role of the person holding the financial interest.
II. Whether the financial interest is direct or indirect.
III. The materiality of the financial interest.
A. I and II only.
B. I and III only.
C. II and III only.
D. I, II, and III.

65. The concept of materiality is least important to an auditor when considering

the

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A. Effects of a direct financial interest in the client upon the auditor’s

independence.
B. Decision whether to use positive or negative confirmations of accounts
receivable.
C. Adequacy of disclosure of a client’s illegal act.
D. Discovery of weaknesses in a client’s internal control.

66. A direct financial interest or a material indirect financial interest in the audit
client of a member of the audit team or his immediate family member may
create a significant self-interest threat. Which of the following safeguards
would be least likely considered to eliminate the threat or reduce it to an
acceptable level?
A. Discuss the matter with those charged with governance of the audit client.
B. Dispose of the direct financial interest prior to the individual becoming a
member of the audit team.
C. Dispose of the indirect financial interest in total or dispose of a sufficient
amount of it so that the remaining interest is no longer material prior to the
individual becoming a member of the audit team.
D. Remove the member of the audit team from the audit engagement.

67. Jayson, CPA, was offered the engagement to audit W Corporation for the year
ended December 31, 2016. He had served as a director of W Corporation until
December 31, 2014, and his spouse currently owns 6,000 of the 100,000
outstanding share capital of W Corporation. Jayson disassociated from W
Corporation prior to being offered the engagement. Moreover, the
engagement does not cover any period that includes Jayson’s association or
employment with W Corporation. Under the code of ethics, Jayson should
A. Accept the engagement.
B. Let a partner from the same office accept and conduct the engagement.
C. Refuse the engagement because he had served as a director.
D. Refuse the engagement because of his spouse’s stock ownership.

68. A loan, or guarantee of a loan, to the firm from an audit client that is a bank or
a similar institution, would not create a threat to independence provided
I. The loan, or guarantee, is made under normal lending procedures, terms
and requirements.
II. The loan is immaterial to both the firm receiving the loan and the audit
client.
A. I only
B. II only
C. Neither I nor II
D. Both I and II

69. A close business relationship between a firm or a member of the audit team, or
a member of that individual’s immediate family, and the audit client or its
management may create
A. Self-interest and intimidation threats
B. Self-review and familiarity threats
C. Advocacy and self-review threats
D. Self-interest and self-review threats

70. When an immediate family member of a member of the assurance team is a

director, an officer, or an employee of the assurance client in a position to
exert direct and significant influence over the subject matter information of the
assurance engagement, or was in such a position during the period covered by
the engagement, the threats to independence can only be reduced to an
acceptable level by
A. Where possible, structuring the responsibilities of the assurance team so
that the professional does not deal with matters that are within the
responsibility of the immediate family member.
B. Withdrawing from the assurance engagement.

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C. Removing the individual from the assurance team.

D. Discussing the issue with those charged with governance, such as the audit
committee.

71. Which of the following threats to independence is created when a member of

the assurance team participates in the assurance engagement while knowing,
or having reason to believe, that he is to, or may, join the assurance client
sometime in the future?
A. Intimidation threat
B. Self-interest threat
C. Self-review threat
D. Familiarity threat

72. Which of the following would not generally create a threat to independence?
A. The purchase of goods and services from an assurance client by the firm (or
from a financial statement audit client by a network firm) or a member of
the assurance team provided that the transaction is in the normal course of
business and on an arm’s length basis.
B. A partner or employee of the firm or a network firm serves as Company
Secretary for a financial statement audit client.
C. Determining which recommendations of the firm should be implemented.
D. Reporting, in a management role, to those charged with governance.

73. The following forms of assistance to a financial statement audit client do not
generally threaten the firm’s independence, except
A. Analyzing and accumulating information for regulatory reporting.
B. Assisting in resolving account reconciliation problems.
C. Authorizing or approving transactions.
D. Assisting in the preparation of consolidated financial statements.

74. As defined in the Code, “a valuation comprises the making of assumptions with
regard to future developments, the application of certain methodologies and
techniques, and the combination of both in order to compute a certain value,
or range of values, for an asset, a liability or for a business as a whole.” Which
of the following threats may be created when a firm or a network firm performs
valuation for an audit client that is to be incorporated in the client’s financial
statements?
A. Advocacy threat
B. Familiarity threat
C. Self-review threat
D. Intimidation threat

75. The following statements relate to the provision of taxation, internal audit or IT
Systems services to audit clients. Which is false?
A. Preparing calculations of current and deferred tax liabilities (or assets) for
an audit client for the purpose of preparing accounting entries that will be
subsequently audited by the firm creates a self-interest threat.
B. A self-review threat may be created when a firm, or network firm, provides
internal audit services to an audit client.
C. The provision of services by a firm or network firm to an audit client that
involve the design and implementation of financial information technology
systems that are used to generate information forming part of a client’s
financial statements may create a self-review threat.
D. The provision of services in connection with the assessment, design, and
implementation of internal accounting controls and risk management
controls does not create a threat to independence provided that firm or
network firm personnel do not perform management functions.

76. What threat to independence is created when the litigation support services
provided to an audit client include the estimation of the possible outcome and
thereby affects the amounts or disclosures to be reflected in the financial
statements?

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A. Self-review threat
B. Advocacy threat
C. Intimidation threat
D. Familiarity threat

77. The recruitment of senior management for an assurance client, such as those
in a position to affect the subject matter of the assurance engagement, may
create the following current or future threats to independence, except
A. Self-interest threat
B. Familiarity threat
C. Intimidation threat
D. Self-review threat

78. When the total fees generated by an assurance client represent a large
proportion of a firm’s total fees, the dependence on that client or client group
and concern about the possibility of losing the client may create a/an
A. Self-interest threat
B. Self-review threat.
C. Intimidation threat
D. Advocacy threat

79. What threat to independence may be created if fees due from an assurance
client for professional services remain unpaid for a long time, especially if a
significant part is not paid before the issue of the assurance report for the
following year?
A. Advocacy threat
B. Self-interest threat
C. Intimidation threat
D. Self-review threat

80. These are fees calculated on a predetermined basis relating to the outcome or
result of a transaction or the result of the work performed.
A. Contingent fees
B. Fixed fees
C. Predetermined fees
D. Commissions.

81. Which of the following threats to independence may be created when litigation
takes place, or appears likely, between the firm or a member of the assurance
team the assurance client?
A. Self-interest or advocacy threat
B. Advocacy or intimidation threat
C. Self-interest or intimidation threat
D. Familiarity or self-review threat

82. As defined in the Code of Ethics, __________ is the communication to the public
of information as to the services or skills provided by professional accountants
in public practice with a view to procuring professional business.
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services

83. As defined in the Code of Ethics, __________ is the communication to the public
of facts about a professional accountant which are not designed for the
deliberate promotion of that professional accountant.
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services

84. Which of the following statements concerning publicity is incorrect?

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A. Booklets and other documents bearing the name of a professional

accountant and giving technical information for the assistance of staff or
clients may be issued to such persons, other professional accountants or
other interested parties.
B. Professional accountants who author books or articles on professional
subjects may state their name and professional qualifications; give the
name of their organization; and give any information as to the services that
the firm provides.
C. Appropriate newspapers or magazines may be used to inform the public of
the establishment of a new practice, of changes in the composition of a
partnership of professional accountants in public practice, or of any
alteration in the address of a practice.
D. A professional accountant may develop and maintain a website in the
Internet in such suitable length and style which may also include
announcements, press releases, publications and such other necessary and
factual information.

85. The holding of media-covered events undertaken only to commemorate a

professional accountant’s anniversaries in public practice does not violate the
rules on advertising and solicitation provided that such undertaking should be
done only every _____ years of celebration.
A. 5
B. 10
C. 20
D. 25

86. A professional accountant in public practice is allowed to

A. Refer to, use or cite actual or purported testimonials by third parties.
B. Publish services in billboard (e.g., tarpaulin, streamers, etc.)
advertisements.
C. Publish and compare fees with other CPAs or CPA firms or compare those
services with those provided by another firm or CPA practitioner.
D. Inform interested parties through any medium that a partnership or salaried
employment of an accountancy nature is being sought.

87. After evaluating the significance of the threat created by an actual or

threatened litigation, the following safeguards should be applied to reduce the
threat to an acceptable level, except
A. Disclosing to the audit committee, or others charged with governance, the
extent and nature of the litigation.
B. If the litigation involves a member of the assurance team, removing that
individual from the assurance team.
C. Involving an additional professional accountant in the firm who was not a
member of the assurance team to review the work or otherwise advise as
necessary.
D. Withdraw from, or refuse to accept, the assurance engagement.

88. When a firm obtains an assurance engagement at a significantly lower fee level
than that charged by the predecessor firm, or quoted by other firms, the self-
interest threat created will not be reduced to an acceptable level unless
I. The firm is able to demonstrate that appropriate time and qualified staff are
assigned to the task.
II. All applicable assurance standards, guidelines, and quality control
procedures are being complied with.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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89. What threat to independence may be created when the fees generated by the
assurance client represent a large proportion of the revenue of an individual of
the firm?
A. Self-review threat
B. Familiarity threat
C. Self-interest threat
D. Advocacy threat

90. The following statements relate to the provision of legal services to an audit
client. Which is incorrect?
A. The provision of legal services to an audit client involving matters that
would not be expected to have a material effect on the financial statements
may create a self-review threat.
B. Legal services to support an audit client in the execution of a transaction
(e.g., contract support) may create a self-review threat.
C. Acting for an audit client in the resolution of a dispute or litigation in such
circumstances when the amounts involved are material in relation to the
financial statements of the audit client would create advocacy and self-
review threats so significant no safeguards could reduce the threats to an
acceptable level.
D. The appointment of a partner or an employee of the firm or network firm as
General Counsel for legal affairs to an audit client would create self-review
and advocacy threats that are so significant no safeguards could reduce the
threats to an acceptable level.

91. When a close family member of a member of the assurance team is a director,
an officer, or an employee of the assurance client in a position to exert direct
and significant influence over the subject matter information of the assurance
engagement, threats to independence may be created. If the threats are other
than clearly insignificant, which of the following safeguards can be applied to
reduce the threats to an acceptable level?
I. Removing the individual from the assurance team.
II. Where possible, structuring the responsibility of the assurance team so
that the professional does not deal with matters that are within the
responsibility of the close family member.
III. Policies and procedures to empower staff to communicate to senior levels
within the firm any issue of independence and objectivity that concerns
them.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III

92. Which of the following threats to independence may be created by family and
personal relationships between a member of the assurance team and a
director, an officer, or an employee of the assurance client in a position to
exert direct and significant influence over the subject matter information of the
assurance engagement?
A. Self-interest, familiarity or intimidation threats
B. Self-review, familiarity, or advocacy threats
C. Advocacy, familiarity or self-review threats
D. Self-interest, advocacy or self-review threats

93. The following circumstances create advocacy threats for a professional

accountant in public practice except
A. Promoting shares in an audit client.
B. Acting as an advocate on behalf of an audit client in litigation or disputes
with third parties.
C. Acting as campaign manager for the president of a client who is running for
a public office.

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D. A member of the assurance team having a significant close business

relationship with an assurance client.

94. Which of the following are elements of a CPA firm’s quality control that should
be considered in establishing its quality control policies and procedures?
Ethical Human Engagement
Requirements Resources Performance
A. No Yes No
B. Yes No No
C. Yes Yes Yes
D. No No Yes

95. The primary purpose of establishing quality control policies and procedures for
deciding whether to accept a new client is to
A. Anticipate before performing any fieldwork whether an unqualified opinion
can be expressed.
B. Enable the CPA firm to attest to the reliability of the client.
C. Satisfy the CPA firm’s duty to the public concerning the acceptance of new
clients.
D. Minimize the likelihood of association with clients whose management lacks
integrity.

96. As defined in PSQC 1, __________ is a process comprising an ongoing

consideration and evaluation of the firm’s system of quality control, including a
periodic inspection of a selection of completed engagements, designed to
provide the firm with reasonable assurance that its system of quality control is
operating effectively.
A. Monitoring
B. Inspection
C. Engagement quality control review
D. Supervision

97. Which element of a system of quality control is addressed by the establishment

of policies and procedures designed to provide the firm with reasonable
assurance that it has sufficient personnel with the competence, capabilities,
and commitment to ethical principles?
A. Monitoring
B. Leadership responsibilities for quality within the firm
C. Human resources
D. Engagement performance

98. The nature, timing, and extent of an audit firm’s quality control policies and
procedures depend on
The Nature Appropriate
The CPA of the CPA Cost-Benefit
Firm’s Size Firm’s Practice Considerations
A. Yes Yes No
B. Yes Yes Yes
C. No No No
D. Yes No Yes

99. For audits of financial statements of listed entities, the engagement partner
should not issue the auditor’s report until the completion of the
A. Engagement Quality Control Review
B. Management Review
C. Engagement Team Review
D. Engagement Partner Review

100. Who should take responsibility for the overall quality on each audit
engagement?
A. Engagement quality control reviewer
B. Engagement partner
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C. Engagement team
D. CPA firm

101. The engagement partner should take responsibility for the direction,
supervision, and performance of the audit engagement in compliance with
professional standards and regulatory and legal requirements, and for the
auditor’s report that is issued to be appropriate in the circumstances.
Supervision includes the following, except
A. Tracking the progress of the audit engagement.
B. Addressing significant issues arising during the audit engagement,
considering their significance, and modifying the planned approach
appropriately.
C. Informing the members of the engagement team of their responsibilities.
D. Identifying matters for consultation or consideration by more experienced
engagement team members during the audit engagement.

102. PSA 220 requires the engagement partner to consider whether members of the
engagement team have complied with the ethical requirements relating to
audit engagements. The Code of Ethics establishes the fundamental principles
of professional ethics, which include
I. Integrity
II. Objectivity
III. Professional competence and due care
IV. Confidentiality
V. Professional behavior
A. I, II, IV, and V only C. I, III, IV, and V only
B. II, III, IV, and V only D. I, II, III, IV, and V

THE FINANCIAL STATEMENT AUDIT: CLIENT ACCEPTANCE AND PLANNING

103. 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.

104. The auditor is required to determine three different levels of materiality: (1)
materiality for the financial statements as a whole, (2) performance
materiality, and (3)
A. Overall materiality
B. Planning materiality
C. General materiality
D. Specific materiality

105. Which of the following statements concerning materiality is not correct?

A. When establishing the overall audit strategy, the auditor shall determine
materiality for the financial statements as a whole.
B. If, in the specific circumstances of the entity, there is one or more particular
classes of transactions, account balances or disclosures for which
misstatements of lesser amounts than materiality for the financial
statements as a whole could reasonably be expected to influence the
economic decisions of users taken on the basis of the financial statements,
the auditor shall also determine the materiality level or levels to those
particular classes of transactions, account balances or disclosures.
C. Determining materiality involves the exercise of professional judgment.
D. The materiality level for the financial statements as a whole determined in
the planning stage of the audit should not be affected by changes in the
circumstances of the engagement.

106. Analytical procedures used in planning an audit should focus on

A. Reducing the scope of tests of controls and substantive tests.

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B. Providing assurance that potential material misstatements will be identified.

C. Enhancing the auditor’s understanding of the client’s business and
identifying areas of potential risk.
D. Assessing the adequacy of the available evidential matter.

107. Which of the following would not be considered an analytical procedure?

A. Estimating payroll expense by multiplying the number of employees by the
average hourly wage rate and the total hours worked.
B. Projecting an error rate by comparing the results of a statistical sample with
the actual population characteristics.
C. Computing accounts receivable turnover by dividing credit sales by the
average net receivables.
D. Developing the expected sales based on the sales trend of the prior five
years.

108. Which of the following auditing procedures most likely would assist an auditor
in identifying related party transactions?
A. Inspecting correspondence with lawyers for evidence of unreported
contingent liabilities.
B. Vouching accounting records for recurring transactions recorded just after
the balance sheet date.
C. Reviewing confirmations of loans receivable and payable for indications of
guarantees.
D. Performing analytical procedures for indications of possible financial
difficulties.

109. Which of the following most likely would indicate the existence of related
parties?
A. Writing down obsolete inventory just before year-end.
B. Failing to correct previously identified internal control deficiencies.
C. Depending on a single product for the success of the entity.
D. Borrowing money at an interest rate significantly below the market rate.

110. Which of the following is an incorrect statement concerning the relationship of

the internal auditor and the scope of the external audit of an entity’s financial
statements?
A. The external auditor is not required to give consideration to the internal
audit function beyond obtaining a sufficient understanding to identify and
assess the risks of material misstatement of the financial statements and to
design and perform further audit procedures.
B. The internal auditors may determine the extent to which audit procedures
should be employed by the external auditor.
C. Under certain circumstances, the internal auditors may assist the external
auditor in performing substantive tests and tests of controls.
D. The nature, timing, and extent of the external auditor’s substantive tests
may be affected by the work of internal auditors.

111. If the results of the auditor’s expert’s work do not provide sufficient appropriate
audit evidence or are not consistent with other audit evidence, the auditor
should
A. Report the matter to the appropriate regulatory agency of the government.
B. Resolve the matter.
C. Withdraw from the engagement.
D. Express an unqualified opinion with reference to the work of the expert.

112. Which of the following matters should be considered by the auditor in

developing the overall audit strategy?
A. Important characteristics of the entity, its business, its financial
performance and its reporting requirements including changes since the
date of the prior audit.
B. Conditions requiring special attention, such as the existence of related
parties.

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C. The setting of materiality levels for audit purposes.

D. All of the above.

RISK ASSESSMENTS AND INTERNAL CONTROL

113. A measure of how willing the auditor is to accept that the financial statements
may be materially misstated after the audit is completed and an unmodified
opinion has been issued is the
A. Inherent risk.
B. Acceptable audit risk.
C. Control risk.
D. Detection risk.

114. When inherent risk is high, there will need to be

A lower More evidence
assessment of audit risk. accumulated by the auditor.
A. Yes Yes
B. No No
C. Yes No
D. No Yes

115. Which of the following is not one of the three primary objectives of effective
internal control?
A. Reliability of financial reporting.
B. Efficiency and effectiveness of operations.
C. Compliance with laws and regulations.
D. Assurance of elimination of business risk.

116. Which of the following are considered control environment elements?

Commitment Detection Organizational
to Competence Risk Structure
A. No Yes No
B. Yes Yes Yes
C. Yes No Yes
D. No No Yes

117. Which of the following statements concerning the relevance of various types of
controls to a financial statement audit is correct?
A. All controls are ordinarily relevant to a financial statement audit.
B. Controls over safeguarding of assets and liabilities are of primary
importance, while controls over the reliability of financial reporting may also
be relevant.
C. Controls over the reliability of financial reporting are ordinarily most directly
relevant to a financial statement audit, but other controls may also be
relevant.
D. An auditor may ordinarily ignore a consideration of controls when a
substantive audit approach is taken.

118. An auditor should consider two key issues when obtaining an understanding of
a client’s internal controls. These issues are
A. The effectiveness and efficiency of the controls.
B. The frequency and effectiveness of the controls.
C. The design and implementation of the controls.
D. The implementation and efficiency of the controls.

119. Authorizations can be either general or specific. Which of the following is not
an example of a general authorization?
A. Automatic reorder points for raw materials inventory.
B. A sales manager’s authorization for a sales return.
C. Credit limits for various classes of transactions.
D. A sales price list for merchandise.

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120. An auditor should obtain sufficient knowledge of an entity’s information

system, including the related business processes relevant to financial
reporting, to understand the
A. Policies used to detect the concealment of fraud.
B. Process used to prepare significant accounting estimates.
C. Safeguards used to limit access to computer facilities.
D. Procedures used to assure proper authorization of transactions.

121. Which of the following controls most likely would provide reasonable assurance
that all credit sales transactions of an entity are recorded?
A. The accounting department supervisor controls the mailing of monthly
statements to customers and investigates any differences reported by
customers.
B. The accounting department supervisor independently reconciles, on a
monthly basis, the accounts receivable subsidiary ledger to the accounts
receivable control account.
C. The billing department supervisor matches prenumbered shipping
documents with entries in the sales journal.
D. The billing department supervisor sends copies of approved sales orders to
the credit department for comparison to authorized credit limits and current
customer account balances.

122. Which of the following control activities in an entity’s revenue/receipt cycle

would provide reasonable assurance that all billed sales are correctly posted to
the accounts receivable ledger?
A. Each shipment of goods on credit is supported by a prenumbered sales
invoice.
B. The accounts receivable subsidiary ledger is reconciled daily to the
accounts receivable control account in the general ledger.
C. Daily sales summaries are compared to daily postings to the accounts
receivable ledger.
D. Each sales invoice is supported by a prenumbered shipping document.

123. Which of the following controls is not usually performed in the accounts
payable department?
A. Indicating on the voucher the affected asset and expense accounts to be
debited.
B. Approving vouchers for payment by having an authorized employee sign
the vouchers.
C. Accounting for unused prenumbered purchase orders and receiving reports.
D. Matching the vendor’s invoice with the related purchase requisition,
purchase order, and receiving report.

124. Which of the following is of least concern to an auditor in assessing the risks of
material misstatement?
A. Signed checks are distributed by the controller to approved payees.
B. Checks are signed by one person.
C. Cash receipts are not deposited intact daily.
D. Treasurer does not verify the names and addresses of check payees.

125. Your client, a merchandising concern, has annual sales of P30,000,000 and a
40% gross profit rate. Tests reveal that 2% of the peso amount of purchases
do not get into inventory because of breakage and inventory pilferage by
employees. The company estimates that these losses could be reduced to
0.5% of purchases by designing and implementing certain controls costing
approximately P350,000. Should the controls be designed and implemented?
A. Yes, regardless of cost-benefit considerations, because the situation
involves employee theft.
B. Yes, because the ideal system of internal control is the most extensive one.
C. No, because the cost of designing and implementing the added controls
exceeds the projected savings.

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D. Yes, because the expected benefits to be derived exceed the cost of the
added controls.

126. After gaining an understanding of internal control and assessing the risks of
material misstatement, an auditor decided to perform tests of controls. The
auditor most likely decided that
A. Additional evidence to support a further reduction in control risk is not
available.
B. It is not possible or practicable to reduce the risks of material misstatement
at the assertion level to an acceptably low level with audit evidence
obtained only from substantive test procedures.
C. There were many internal control weaknesses that could allow
misstatements to enter the accounting system.
D. An increase in the assessed level of control risk is justified for certain
financial statement assertions.

127. An auditor may decide to assess control risk at the maximum level for certain
assertions because the auditor believes
A. Controls are unlikely to pertain to the assertions.
B. The entity’s control components are interrelated.
C. Sufficient appropriate audit evidence to support the assertions is likely to be
available.
D. More emphasis on tests of controls than substantive tests is warranted.

128. Which of the following statements is correct concerning an auditor’s

assessment of control risk?
A. Assessing control risk may be performed concurrently during an audit with
obtaining an understanding of the entity’s internal control.
B. Evidence about the operation of controls in prior audits may not be
considered during the current year’s assessment of control risk.
C. The basis for an auditor’s conclusions about the assessed level of control
risk need not be documented unless control risk is assessed at the
maximum level.
D. The lower the assessed level of control risk, the less assurance the evidence
must provide that the controls are operating effectively.

129. According to PSA 330 (The Auditor’s Procedures in Response to Assessed

Risks), an auditor who plans to rely on controls that have not changed since
they were last tested should test the operating effectiveness of such controls
at least once every
A. Second audit
B. Third audit
C. Fourth audit
D. Fifth audit

130. In performing tests of the operating effectiveness of an entity’s controls, an

auditor selects from a variety of techniques, including
A. Reperformance and observation.
B. Inquiry and analytical procedures.
C. Comparison and confirmation.
D. Inspection and verification.

131. An auditor intends to perform tests of control on a client’s cash disbursements

procedures. If the control procedures leave no audit trail of documentary
evidence, the auditor most likely will test the procedures by
A. Inquiry and analytical procedures.
B. Inquiry and observation.
C. Analytical procedures and confirmation.
D. Confirmation and observation.

132. Which of the following tests of controls most likely would help assure an auditor
that goods shipped are properly billed?

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A. Scan the sales journal for sequential and unusual entries.

B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable ledger to daily sales summaries.
D. Inspect unused sales invoices for consecutive prenumbering.

133. When there are numerous property and equipment transactions during the
year, an auditor who plans to assess control risk at a low level usually performs
A. Tests of controls and extensive tests of property and equipment balances at
the end of the year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment
transactions.
D. Analytical procedures for property and equipment balances at the end of
the year.

FRAUD AND ERROR

134. Misstatements in the financial statements can arise from fraud or error. The
distinguishing factor between fraud and error is whether the underlying action
that results in the misstatement of the financial statements is
I. Intentional or unintentional.
II. Rational or irrational.
A. I only C. Both I and II
B. II only D. Neither I nor II.

135. “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.

136. Fraud involving one or more members of management or those charged with
governance is referred to as
A. Management fraud. C. Fraudulent financial reporting.
B. Employee fraud. D. Misappropriation of assets.

137. The auditor is concerned with fraud that causes a material misstatement in the
financial statements. There are two types of intentional misstatements that
are relevant to the auditor: misstatements resulting from fraudulent financial
reporting and misstatements resulting from
A. Management fraud.
B. Employee fraud.
C. Misappropriation of assets.
D. Collusion within the entity or with third parties.

138. Fraudulent financial reporting involves intentional misstatements including

omissions of amounts or disclosures in financial statements to deceive financial
statement users. It may be accomplished in a number of ways, including
A. Embezzling receipts.
B. Stealing physical assets or intellectual property.
C. Using an entity’s assets for personal use.
D. Manipulation, falsification, or alteration of accounting records or supporting
documentation from which the financial statements are prepared.

139. Which of the following conditions are generally present when misstatements
due to fraud occur?
I. Incentive or pressure.

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II. Perceived opportunity.

III. Rationalization.
A. I and II only. C. I and III only.
B. II and III only. D. I, II, and III.

140. 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.

141. 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 Philippine
Standards on Auditing (PSAs).

142. When obtaining an understanding of the entity and its environment, including
its internal control, the auditor may identify events or conditions that indicate
an incentive or pressure to commit fraud or provide an opportunity to commit
fraud. Such events or conditions are referred to as
A. Fraud conditions. C. Fraudulent activities.
B. Fraud risk factors. D. Fraud environment.

143. The following are examples of fraud risk factors relating to misstatements
arising from misappropriation of assets, except
A. Recurring negative cash flows from operating activities while reporting
earnings and earnings growth.
B. Inadequate physical safeguards over cash, investments, inventory, or fixed
assets.
C. Inadequate segregation of duties or independent checks.
D. Adverse relationship between the entity and employees with access to cash
or other assets susceptible to theft created by recent changes made to
employee compensation or benefit plans.

144. Opportunities to misappropriate assets increase when there are

A. Known or anticipated future employee layoffs.
B. Promotions, compensation, or other rewards inconsistent with expectations.
C. Recent or anticipated changes to employee compensation or benefit plans.
D. Inventory items that are small in size, of high value, or in high demand.

145. Which of the following conditions or events may create incentives/pressures to

commit fraud?
A. Inadequate system of authorization and approval of transactions.
B. Lack of mandatory vacations for employees performing key control
functions.
C. Excessive pressure on management or operating personnel to meet
financial targets established by those charged with governance, including
sales or profitability incentive goals.
D. Inadequate access controls over automated records.

146. Because of the risk of material misstatement, an audit of financial statements

in accordance with PSAs should be planned and performed with an attitude of
A. Impartial conservatism.

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B. Objective judgment.
C. Independent integrity.
D. Professional skepticism.

147. When planning the audit, the auditor should make inquiries of management.
Such inquiries should address the following, except
A. Management’s assessment of the risk that the financial statements may be
misstated due to fraud.
B. Management’s process for identifying and responding to the risks of fraud in
the entity.
C. Management’s consideration of how an element of unpredictability will be
incorporated into the nature, timing, and extent of the audit procedures to
be performed.
D. Management’s communication, if any, to those charged with governance
regarding its processes for identifying and responding to the risks of fraud in
the entity.

148. When the auditor identifies a misstatement in the financial statements, the
auditor should consider whether such a misstatement may be indicative of
fraud and if there is such an indication, the auditor should
A. Consider the implications of the misstatement in relation to other aspects of
the audit.
B. Withdraw from the engagement.
C. Communicate the information to regulatory and enforcement authorities.
D. Report the matter to the person or persons who made the audit
appointment.

AUDITING IN A CIS/IT ENVIRONMENT

149. The use of a computer changes the processing, storage, and communication of
financial information. A CIS environment may affect the following, except
A. The accounting and internal control systems of the entity.
B. The overall objective and scope of an audit.
C. The auditor’s design and performance of tests of control and substantive
procedures to satisfy the audit objectives.
D. The specific procedures to obtain knowledge of the entity’s accounting and
internal control systems.

150. The following are benefits of using IT-based controls, except

A. Ability to process large volume of transactions.
B. Over-reliance on computer-generated reports.
C. Ability to replace manual controls with computer-based controls.
D. Reduction in misstatements due to consistent processing of transactions.

151. Which of the following statements concerning the Internet is incorrect?

A. The Internet is a shared public network that enables communication with
other entities and individuals around the world.
B. The Internet is a private network that only allows access to authorized
persons or entities.
C. The Internet is interoperable, which means that any computer connected to
the Internet can communicate with any other computer connected to the
Internet.
D. The Internet is a worldwide network that allows entities to engage in e-
commerce/e-business activities.

152. In planning the portions of the audit which may be affected by the client’s CIS
environment, the auditor should obtain an understanding of the significance
and complexity of the CIS activities and the availability of data for use in the
audit. The following relate to the complexity of CIS activities except when
A. Transactions are exchanged electronically with other organizations (for
example, in electronic data interchange systems [EDI]).

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B. Complicated computations of financial information are performed by the

computer and/or material transactions or entries are generated
automatically without independent validation.
C. Material financial statement assertions are affected by the computer
processing.
D. The volume of transactions is such that users would find it difficult to
identify and correct errors in processing.

153. The auditor shall consider the entity’s CIS environment in designing audit
procedures to reduce risk to an acceptably low level. Which of the following
statements is incorrect?
A. The auditor’s specific audit objectives do not change whether financial
information is processed manually or by computer.
B. The methods of applying audit procedures to gather audit evidence are not
influenced by the methods of computer processing.
C. The auditor may use either manual audit procedures, computer-assisted
audit techniques (CAATs), or a combination of both to obtain sufficient
appropriate audit evidence.
D. In some CIS environments, it may be difficult or impossible for the auditor to
obtain certain data for inspection, inquiry, or confirmation without the aid of
a computer.

154. A characteristic that distinguishes computer processing from manual

processing is
A. The potential for systematic error is ordinarily greater in manual processing
than in computerized processing.
B. Errors or fraud in computer processing will be detected soon after their
occurrences.
C. Most computer systems are designed so that transaction trails useful for
audit purposes do not exist.
D. Computer processing virtually eliminates the occurrence of computational
errors normally associated with manual processing.

155. Which of the following statements most likely represents a disadvantage for an
entity that maintains data files on personal computers (PCs) rather than
manually prepared files?
A. It is usually more difficult to compare recorded accountability with the
physical count of assets.
B. Random error associated with processing similar transactions in different
ways is usually greater.
C. Attention is focused on the accuracy of the programming process rather
than errors in individual transactions.
D. It is usually easier for unauthorized persons to access and alter the files.

156. The internal controls over computer processing include both manual
procedures and procedures designed into computer programs (programmed
control procedures). These manual and programmed control procedures
comprise the general CIS controls and CIS application controls. The purpose of
general CIS controls is to
A. Establish specific control procedures over the accounting applications in
order to provide reasonable assurance that all transactions are authorized
and recorded and are processed completely, accurately, and on a timely
basis.
B. Establish a framework of overall controls over the CIS activities and to
provide a reasonable level of assurance that the overall objectives of
internal control are achieved.
C. Provide reasonable assurance that systems are developed and maintained
in an authorized and efficient manner.
D. Provide reasonable assurance that access to data and computer programs
is restricted to authorized personnel.

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157. An entity has recently converted its purchasing cycle from a manual process to
an online computer system. Which of the following is a probable result
associated with conversion to the new IT system?
A. Traditional duties are less separated.
B. Increased processing time.
C. Reduction in the entity’s risk exposure.
D. Increased processing errors.

158. An entity should plan the physical location of its computer facility. Which of the
following is the primary consideration for selecting a computer site?
A. It should be in the basement or on the ground floor.
B. It should maximize the visibility of the computer.
C. It should minimize the distance that data control personnel must travel to
deliver data and reports and be easily accessible by a majority of company
personnel.
D. It should provide security.

159. An entity installed antivirus software on all its personal computers. The
software was designed to prevent initial infections, stop replication attempts,
detect infections after their occurrence, mark affected system components,
and remove viruses from infected components. The major risk in relying on
antivirus software is that it may
A. Consume too many system resources.
B. Interfere with system operations.
C. Not detect certain viruses.
D. Make software installation too complex.

AUDIT OBJECTIVES, PROCEDURES, EVIDENCE, AND DOCUMENTATION

160. Which of the following should be considered by the auditor in deciding which
means (or combination of means) to use in selecting items for testing?
I. The risk of material misstatement related to the assertion being tested.
II. Audit efficiency.
A. I only C. Both I and II
B. II only D. Neither I nor II

161. The quantity of audit evidence needed is affected by the risk of misstatement
and also by the quality of such audit evidence.
The reliability of audit evidence is influenced by its source and by its nature
and is dependent on the individual circumstances under which it is obtained.
A. Both statements are true. C. True; False.
B. Both statements are false. D. False; True.

162. Which of the following is a false statement about audit objectives?

A. There should be a one-to-one relationship between audit objectives and
procedures.
B. Audit objectives should be developed in light of management assertions
about the financial statement components.
C. Selection of tests to meet audit objectives should depend upon the
understanding of internal control.
D. The auditor should resolve any substantial doubt about any of
management’s material financial statement assertions.

163. Which of the following statements concerning evidential matter is true?

A. Appropriate evidence supporting management’s assertions should be
convincing rather than merely persuasive.
B. Effective internal control contributes little to the reliability of the evidence
created within the entity.
C. The cost of obtaining evidence is not an important consideration to an
auditor in deciding what evidence should be obtained.

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D. A client’s accounting records cannot be considered sufficient evidence to

support the financial statements.

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

165. Which of the following generalizations does not relate to the appropriateness of
evidence?
A. Audit evidence from external sources (for example, confirmation received
from a third party) is more reliable than that generated internally.
B. An auditor’s opinion, to be economically useful, is formed within reasonable
time and based on evidence obtained at a reasonable cost.
C. Audit evidence generated internally is more reliable when the related
accounting and internal control systems are effective.
D. Audit evidence obtained directly by the auditor is more reliable than that
obtained from the entity.

166. Each of the following might, by itself, form a valid basis for an auditor to decide
to omit a test except for the
A. Difficulty and expense involved in testing a particular item.
B. Assessment of control risk at a low level.
C. Inherent risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.

167. In which of the following circumstances would the use of the negative form of
accounts receivable confirmation most likely be justified?
A. A substantial number of accounts may be in dispute and the accounts
receivable balance arises from sales to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts
receivable balance arises from sales to many customers with small
balances.
C. A small number of accounts may be in dispute and the accounts receivable
balance arises from sales to a few major customers.
D. A small number of accounts may be in dispute and the accounts receivable
balance arises from sales to many customers with small balances.

168. Which of the following statements is correct concerning the use of negative
confirmation requests?
A. Unreturned negative confirmation requests rarely provide significant explicit
evidence.
B. Negative confirmation requests are effective when detection risk is low.
C. Unreturned negative confirmation requests indicate that alternative
procedures are necessary.
D. Negative confirmation requests are effective when understatements of
account balances are suspected.

169. Which of the following most likely would give the most assurance concerning
the valuation and allocation assertion of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping
documents.
B. Comparing receivable turnover ratios with industry statistics for
reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for uncollectible accounts for reasonableness.

170. Confirmation is “the process of obtaining and evaluating a direct

communication from a third party in response to a request for information
about a particular item affecting financial statement assertions.” Two

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assertions for which confirmation of accounts receivable balances provides

primary evidence are
A. Completeness and valuation
B. Valuation and rights and obligations
C. Rights and obligations and existence
D. Existence and completeness

171. To gain assurance that all inventory items in a client’s inventory listing
schedule are valid, an auditor most likely would vouch
A. Inventory tags noted during the auditor’s observation to items listed in the
inventory listing schedule.
B. Inventory tags noted during the auditor’s observation to items listed in
receiving reports and vendors’ invoices.
C. Items listed in the inventory listing schedule to inventory tags and the
auditor’s recorded count sheets.
D. Items listed in receiving reports and vendors’ invoices to the inventory
listing schedule.

172. An auditor selected items for test counts while observing a client’s physical
inventory. The auditor then traced the test counts to the client’s inventory
listing. This procedure most likely obtained evidence concerning
management’s assertion of
A. Rights and obligations C. Existence
B. Completeness D. Valuation

173. Which of the following is an audit procedure that an auditor most likely would
perform concerning litigation, claims, and assessments?
A. Request the client’s lawyer to evaluate whether the client’s pending
litigation, claims, and assessments indicate a going concern problem.
B. Examine the legal documents in the client’s lawyer’s possession concerning
litigation, claims, and assessments to which the lawyer has devoted
substantive attention.
C. Discuss with management its policies and procedures adopted for
evaluating and accounting for litigation, claims, and assessments.
D. Confirm directly with the client’s lawyer that all litigation, claims, and
assessments have been recorded or disclosed in the financial statements.

174. Which of the following is not an audit procedure that the independent auditor
would perform with respect to litigation, claims, and assessments?
A. Inquire of and discuss with management the policies and procedures
adopted for litigation, claims, and assessments.
B. Obtain from management a description and evaluation of litigation, claims,
and assessments that existed at the balance sheet date.
C. Obtain assurance from management that if has disclosed all unasserted
claims that the lawyer has advised are probable of assertion and must be
disclosed.
D. Confirm directly with the client’s lawyer that all claims have been recorded
in the financial statements.

175. The following are ordinarily excluded from audit documentation:

A B C D
Superseded drafts of working papers and financial
statements Yes No No Yes
Notes that reflect incomplete or preliminary thinkingYes Yes No No
Previous copies of documents corrected for
typographical or other errors Yes Yes Yes Yes
Duplicates of documents Yes No Yes No

176. Audit documentation may be recorded on paper or on electronic or other

media. The following are examples of audit documentation, except
A. Audit programs
B. Letters of confirmation and representation

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C. Correspondence (including e-mail) concerning significant matters

D. The entity’s accounting records

177. The completion of the assembly of the final audit file after the date of the
auditor’s report does not ordinarily involve
A. The performance of new audit procedures or the drawing of new
conclusions.
B. Sorting, collating and cross-referencing working papers.
C. Deleting or discarding superseded documentation.
D. Signing off on completion checklists relating to the file assembly process.

AUDIT SAMPLING

178. Audit sampling involves the

A. Selection of all items over a certain amount.
B. Application of audit procedures to less than 100% of items within a class of
transactions or an account balance such that all items have a chance of
selection.
C. Application of audit procedures to all items that comprise a class of
transactions or an account balance.
D. Application of audit procedures to all items over a certain amount and those
that are unusual or have a history of error.

179. Population, as defined in PSA 530, means the entire set of data from which a
sample is selected and about which the auditor wishes to draw conclusions. It
is important for the auditor to ensure that the population is
I. Appropriate to the objective of the audit procedure.
II. Complete.
A. I only C. Both I and II
B. II only D. Neither I nor II

180. An advantage of statistical over nonstatistical sampling methods in tests of

controls is that the statistical methods
A. Afford greater assurance than a nonstatistical sample of equal size.
B. Provide an objective basis for quantitatively evaluating sampling risks.
C. Can more easily convert the sample into a dual-purpose test useful for
substantive testing.
D. Eliminate the need to use judgment in determining appropriate sample
sizes.

181. Which of the following best illustrates 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. An auditor may select audit procedures that are not appropriate to achieve
the specific objective.
C. An auditor may fail to recognize errors in the documents examined for the
chosen sample.
D. The documents related to the chosen sample may not be available for
inspection.

182. Which of the following statistical selection techniques is least desirable for use
by an auditor?
A. Systematic selection C. Block selection
B. Stratified selection D. Sequential selection

183. Which of the following combinations results in a decrease in sample size in a

sample for attributes?
Risk of Expected
assessing Tolerable population
control risk too low rate deviation rate
A. Increase Decrease Increase
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B. Decrease Increase Decrease

C. Increase Increase Decrease
D. Increase Increase Increase

184. The diagram below depicts the auditor’s estimated maximum deviation rate
compared with the tolerable rate and also depicts the true population deviation
rate compared with the tolerable rate.
True State of Population
Auditor’s
Estimate Deviation Rate Deviation Rate
Based on Is less than Exceeds
Sample Results Tolerable Rate Tolerable Rate

Maximum
Deviation Rate I. III.
Is Less than
Tolerable Rate

Maximum
Deviation Rate II. IV.
Exceeds
Tolerable Rate

As a result of tests of controls, the auditor assesses control risk higher than
necessary and thereby increases substantive testing. This is illustrated by
A. I C. III
B. II D. IV

COMPLETING THE AUDIT AND POST-AUDIT RESPONSIBILITIES

185. Analytical procedures used in the overall review stage of the audit generally
include
A. Retesting controls that appeared to be ineffective during the assessment of
control risk.
B. Considering unusual or unexpected account balances that were not
previously identified.
C. Gathering evidence concerning account balances that have not changed
from the prior year.
D. Performing tests of transactions to corroborate management’s financial
statement assertions.

186. Analytical procedures performed in the overall review stage of an audit suggest
that several accounts have unexpected relationships. The results of these
procedures most likely indicate that
A. The communication with the audit committee should be revised.
B. Irregularities exist among the relevant account balances.
C. Additional substantive tests of details are required.
D. Internal control activities are not operating effectively.

187. The auditor should review information provided by those charged with
governance and management identifying
I. The names of all known related parties.
II. Related party transactions.
A. I only. C. Both I and II.
B. II only. D. Neither I nor II.

188. Which of the following events most likely indicates the existence of related
parties?
A. Making a loan without scheduled terms for repayment of the funds.
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.
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189. An auditor searching for related party transactions should obtain an

understanding of each subsidiary’s relationship to the total entity because
A. This may permit the audit of intercompany account balances to be
performed as of concurrent dates.
B. This may reveal whether particular transactions would have taken place if
the parties had not been related.
C. The business structure may be deliberately designed to obscure related
party transactions.
D. Intercompany transactions may have been consummated on terms
equivalent to arm’s-length transactions.

190. After determining that a related party transaction has, in fact, occurred, an
auditor should
A. Obtain an understanding of the business purpose of the transaction.
B. Substantiate that the transaction was consummated on terms equivalent to
an arm’s-length transaction.
C. Add a separate paragraph to the auditor’s report to explain the transaction.
D. Perform analytical procedures to verify whether similar transactions
occurred, but were not recorded.

191. As used in PSA 560 (Subsequent Events), the term “subsequent events” refers
to
I. Events occurring between the date of the financial statements and the date
of the auditor’s report.
II. Facts discovered after the date of the auditor’s report.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

192. Which of the following statements best describes the “date of the financial
statements?”
A. The date on which those with the recognized authority assert that they
have prepared the entity’s complete set of financial statements, including
the related notes, and that they have taken responsibility for them.
B. The date that the auditor’s report and audited financial statements are
made available to third parties.
C. The date of the end of the latest period covered by the financial statements,
which is normally the date of the most recent balance sheet in the financial
statements subject to audit.
D. The date on which the auditor has obtained sufficient appropriate audit
evidence on which to base the opinion on the financial statements.

193. Which of the following procedures would an auditor most likely perform to
obtain evidence about the occurrence of subsequent events?
A. Inquiring as to whether any unusual adjustments were made after the date
of the financial statements.
B. Confirming a sample of material accounts receivable established after the
date of the financial statements.
C. Comparing the financial statements being reported on with those of the
prior period.
D. Investigating personnel changes in the accounting department occurring
after the date of the financial statements.

194. Which of the following statements best expresses the auditor’s responsibility
with respect to facts discovered after the date of the auditor’s report but
before the date the financial statements are issued?
A. The auditor should amend the financial statements.
B. If the facts discovered will materially affect the financial statements, the
auditor should issue a new report which contains either a qualified opinion
or an adverse opinion.

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C. The auditor should consider whether the financial statements need

amendment, discuss the matter with management, and consider taking
actions appropriate in the circumstances.
D. The auditor should withdraw from the engagement.

195. After issuing a report, an auditor has no obligation to make continuing inquiries
or perform other procedures concerning the audited financial statements,
unless
A. Final determinations or resolutions are made of contingencies that had been
disclosed in the financial statements.
B. Information about an event that occurred after the date of the auditor’s
report comes to the auditor’s attention.
C. The control environment changes after issuance of the report.
D. Information, which existed at the report date and may affect the report,
comes to the auditor’s attention.

196. Which of the following events occurring after the issuance of an auditor’s
report most likely would cause the auditor to make further inquiries about the
previously issued financial statements?
A. A technological development that could affect the entity’s future ability to
continue as a going concern.
B. The entity’s sale of a subsidiary that accounts for 30% of the entity’s
consolidated sales.
C. The discovery of information regarding a contingency that existed before
the financial statements were issued.
D. The final resolution of a lawsuit disclosed in the notes to the financial
statements.

197. PSA 570 (Going Concern) states that a fundamental principle in the preparation
of financial statements is the going concern assumption. Under this
assumption, an entity is ordinarily viewed as continuing in business for the
foreseeable future with neither the intention nor the necessity of liquidation,
ceasing trading or seeking protection from creditors pursuant to laws and
regulations. The responsibility to make an assessment of an entity’s ability to
continue as a going concern rests with the
A. Auditor
B. Entity’s management
C. SEC
D. Entity’s creditors

198. Which of the following statements best describes the auditor’s responsibility
concerning the appropriateness of the going concern assumption in the
preparation of the financial statements?
A. The auditor’s responsibility is to make a specific assessment of the entity’s
ability to continue as a going concern.
B. The auditor’s responsibility is to predict future events or conditions that
may cause the entity to cease to continue as a going concern.
C. The auditor’s responsibility is to consider the appropriateness of
management’s use of the going concern assumption and consider whether
there are material uncertainties about the entity’s ability to continue as a
going concern that need to be disclosed in the financial statements.
D. The auditor’s responsibility is to give a guarantee in the audit report that
the entity has the ability to continue as a going concern.

199. Which of the following conditions or events most likely would cause an auditor
to have substantial doubt about an entity’s ability to continue as a going
concern?
A. Cash flows from operating activities are negative.
B. Stock dividends replace annual cash dividends.
C. Significant related party transactions are pervasive.
D. Research and development projects are postponed.

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200. Which of the following conditions or events most likely would cause an auditor
to have substantial doubt about an entity’s ability to continue as a going
concern?
A. Restrictions on the disposal of principal assets are present.
B. Usual trade credit from suppliers is denied.
C. Significant related party transactions are pervasive.
D. Arrearages in principal stock dividends are paid.

201. Which of the following audit procedures would most likely assist an auditor in
identifying conditions and events that may indicate there could be substantial
doubt about an entity’s ability to continue as a going concern?
A. Confirmation of bank balances.
B. Confirmation of accounts receivable from major customers.
C. Reconciliation of interest expense with debt outstanding.
D. Review of compliance with terms of debt agreements.

202. Harold, CPA, believes there is substantial doubt about the ability of Jersamtan
Co. to continue as a going concern for a reasonable period of time. In
evaluating Jersamtan’s plans for dealing with the adverse effects of future
conditions and events, Harold most likely would consider, as a mitigating
factor, Jersamtan’s plans to
A. Postpone expenditures for research and development projects.
B. Purchase production facilities currently being leased from a related party.
C. Strengthen internal controls over cash disbursements.
D. Discuss with lenders the terms of all debt and loan agreements.

203. When an auditor concludes that there is substantial doubt about a continuing
audit client’s ability to continue as a going concern for a reasonable period of
time, the auditor’s responsibility is to
A. Consider the adequacy of disclosure about the client’s possible inability to
continue as a going concern.
B. Issue a qualified or adverse opinion, depending upon materiality, due to the
possible effects on the financial statements.
C. Report to the client’s audit committee that management’s accounting
estimates may need to be adjusted.
D. Reissue the prior year’s auditor’s report and add an emphasis of matter
paragraph that specifically refers to “substantial doubt” and “going
concern.”

204. The auditor is required to obtain audit evidence that management

I. Acknowledges its responsibility for the fair presentation of the financial
statements in accordance with applicable financial reporting framework.
II. Has approved the financial statements.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

205. When an audit is made in accordance with generally accepted auditing

standards, the auditor should always
A. Observe the taking of physical inventory on the balance sheet date.
B. Obtain certain written representations from management.
C. Employ analytical procedures as substantive tests to obtain evidence about
specific assertions related to account balances.
D. Document the understanding of the client’s internal control and the basis
for all conclusions about the assessed level of control risk for financial
statement assertions.

206. When considering the use of management’s written representations as audit

evidence about the completeness assertion, an auditor should understand that
such representations

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A. Constitute sufficient appropriate audit evidence to support the assertion

when considered in combination with a sufficiently low assessed level of
control risk.
B. Are not part of the audit evidence considered to support the assertion.
C. Replace a low assessed level of control risk as audit evidence to support the
assertion.
D. Complement, but do not replace, substantive tests designed to support the
assertion.

207. A written representation from a client’s management that, among other

matters, acknowledges responsibility for the fair presentation of financial
statements, should normally be signed by the
A. Chief financial officer and the chair of the board of directors.
B. Chief executive officer and the chief financial officer.
C. Chief executive officer, the chair of the board of directors, and the client’s
lawyer.
D. Chair of the audit committee of the board of directors.

208. The date of the management representation letter should coincide with the
date of the
A. Statement of Financial Position
B. Latest related party transaction
C. Auditor’s report
D. Latest interim financial information

209. Which of the following statements concerning management representations is

incorrect?
A. Representations by management can be a substitute for other audit
evidence that the auditor could reasonably expect to be available.
B. If the auditor is unable to obtain sufficient appropriate audit evidence
regarding a matter, which has, or may have, a material effect on the
financial statements and such audit evidence is expected to be available,
this will constitute a limitation in the scope of the audit, even if a
representation from management has been received on the matter.
C. If a representation by management is contradicted by other audit evidence,
the auditor should investigate the circumstances and, when necessary,
reconsider the reliability of other representations by management.
D. The auditor’s working papers would ordinarily include a summary of oral
discussions with management or written representations from
management.

210. What type of opinion should be expressed if the client’s management refuses
to provide a representation that the auditor considers necessary?
A. Qualified opinion or a disclaimer of opinion.
B. Qualified opinion or an adverse opinion.
C. Adverse opinion or a disclaimer of opinion.
D. Unqualified opinion.

211. The primary source of information to be reported about litigation, claims, and
assessments is the
A. Independent auditor
B. Client’s management
C. Court records
D. Client’s lawyer

212. The primary reason an auditor requests that letters of inquiry be sent to a
client’s attorneys is to provide the auditor with
A. A description and evaluation of litigation, claims, and assessments that
existed at the balance sheet date.
B. The attorneys’ opinions of the client’s historical experiences in recent
similar litigation.

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C. Corroboration of the information furnished by management about litigation,

claims, and assessments.
D. The probable outcome of asserted claims and pending or threatened
litigation.

213. The letter of audit inquiry should be

A. Prepared and sent by the auditor.
B. Prepared by management and sent by the auditor.
C. Prepared and sent by management.
D. Prepared by the auditor and sent by management.

214. The refusal of a client’s lawyer to provide a representation on the legality of a

particular act committed by the client is ordinarily
A. Proper grounds to withdraw from the engagement.
B. Insufficient reason to modify the auditor’s report because of the lawyer’s
obligation of confidentiality.
C. Considered to be a scope limitation.
D. Sufficient reason to issue a “subject to” opinion.

215. Management’s refusal to give the auditor permission to communicate with the
entity’s legal counsel is most likely to lead to
A. An adverse opinion.
B. A qualified opinion or an adverse opinion.
C. An unqualified opinion.
D. A qualified opinion or a disclaimer of opinion.

216. In which of the following circumstances would an auditor most likely meet with
the client’s legal counsel to discuss the likely outcome of the litigation and
claims?
I. The auditor determines that the matter is a significant risk.
II. There is a disagreement between management and the entity’s legal
counsel.
III. The subject matter of the litigation is complex.
A. I and II only.
B. II and III only.
C. I and III only.
D. I, II, and III.

217. Which of the following statements extracted from a client’s lawyer’s letter
concerning litigation, claims, and assessments most likely would cause the
auditor to request clarification?
A. “I believe that the action can be settled for less than the damages claimed.”
B. “I believe that the company will be able to defend this action successfully.”
C. “I believe that the plaintiff’s case against the company is without merit.”
D. “I believe that the possible liability to the company is nominal in amount.”

218. The auditor should consider the status of legal matters up to the
A. Balance sheet date.
B. Date of the auditor’s report.
C. Date of approval of the financial statements.
D. Date of issuance of the financial statements.

THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS

219. The following statements relate to the date of the auditor’s report. Which is
false?
A. The auditor should date the report as of the completion date of the audit.
B. The date of the auditor’s report should not be earlier than the date on which
the financial statements are signed or approved by management.
C. The date of the auditor’s report should not be later than the date on which
the financial statements are signed or approved by management.

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D. The date of the auditor’s report should always be later than the date of the
financial statements (i.e., the balance sheet date).

220. In which of the following circumstances would an auditor most likely add an
emphasis of matter paragraph to the auditor’s report while expressing an
unqualified opinion?
A. There is a substantial doubt about the entity’s ability to continue as a going
concern.
B. Management’s estimates of the effects of future events are unreasonable.
C. No depreciation has been provided in the financial statements.
D. Certain transactions cannot be tested because of management’s records
retention policy.

221. 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. Unmodified opinion C. Adverse opinion.
B. Disclaimer of opinion D. Scope qualification

222. A note to the financial statements of the Prudent Bank indicates that all of the
records relating to the bank’s business operations are stored on magnetic
disks, and that no emergency backup systems or duplicate disks are stored
because the bank and its auditors consider the occurrence of a catastrophe to
be remote. Based upon this note, the auditor’s report should express
A. A qualified opinion C. An adverse opinion
B. An unmodified opinion D. A “subject to” opinion
223. When would the auditor refer to the work of an appraiser in the auditor’s
report?
A. An adverse opinion is expressed based on a difference of opinion between
the client and the outside appraiser as to the value of certain assets.
B. A disclaimer of opinion is expressed because of a scope limitation imposed
on the auditor by the appraiser.
C. A qualified opinion is expressed because of a matter unrelated to the work
of the appraiser.
D. An unqualified opinion is expressed and an emphasis of matter paragraph is
added to disclose the use of the appraiser’s work.

224. Which of the following terms is used in the standard to describe the effects on
the financial statements of misstatements or the possible effects on the
financial statements, if any, that are undetected due to an inability to obtain
sufficient appropriate audit evidence?
A. Persuasive C. Material
B. Pervasive D. Extensive

225. When audited financial statements are presented in a document (e.g., annual
report) containing other information, the auditor
A. Should read the other information to consider whether it is inconsistent with
the audited financial statements.
B. Has no responsibility for the other information because it is not part of the
basic financial statements.
C. Has an obligation to perform auditing procedures to corroborate the other
information.
D. Is required to express a qualified opinion if the other information has a
material misstatement of fact.

226. An auditor concludes that there is a material inconsistency in the other

information in an annual report to shareholders containing audited financial
statements. If the auditor concludes that the financial statements do not
require revision, but the client refuses to revise or eliminate the material
inconsistency, the auditor may

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A. Disclaim an opinion on the financial statements after explaining the

material inconsistency in an emphasis of matter paragraph.
B. Revise the auditor’s report to include an other matter paragraph describing
the material inconsistency.
C. Express a qualified opinion after discussing the matter with the client’s
directors.
D. Consider the matter closed because the other information is not in the
audited statements.

227. An auditor may express a qualified opinion under which of the following
circumstances?
Lack of Sufficient Restriction on the
Appropriate Evidence Scope of the Audit
A. No No
B. No Yes
C. Yes No
D. Yes Yes

228. In which of the following situations would an auditor ordinarily choose between
expressing a qualified opinion or an adverse opinion?
A. The auditor wishes to emphasize an unusually important subsequent event.
B. The financial statements fail to disclose information that is required by
Philippine Financial Reporting Standards.
C. Events disclosed in the financial statements cause the auditor to have
substantial doubt about the entity’s ability to continue as a going concern.
D. The auditor did not observe the entity’s physical inventory and is unable to
become satisfied as to its balance by other auditing procedures.

229. An auditor should disclose the substantive reasons for expressing an adverse
opinion in the Basis for Adverse Opinion paragraph
A. Following the opinion paragraph.
B. Preceding the opinion paragraph.
C. Following the introductory paragraph.
D. Within the notes to the financial statements.

230. There are two broad financial reporting frameworks for comparatives: the
corresponding figures and the comparative financial statements. Which of the
following statements is correct concerning these reporting frameworks?
A. Under the corresponding figures framework, the corresponding figures for
the prior period(s) are integral part of the current period financial
statements.
B. Under the corresponding figures framework, the corresponding figures for
the prior period(s) are considered separate financial statements.
C. Under the comparative financial statements framework, the comparative
financial statements for the prior period(s) are intended to be read in
conjunction with the amounts and other disclosures relating to the current
period.
D. Under the comparative financial statements framework, the amounts and
other disclosures for the prior period(s) form part of the current period
financial statements.

231. In which of the following circumstances would an auditor’s report least likely
include specific reference to the corresponding figures?
A. When the auditor’s report on the prior period, as previously issued, included
a modified opinion and the matter which gave rise to the modification is
resolved and properly dealt with in the financial statements.
B. When the auditor’s report on the prior period, as previously issued, included
a modified opinion and the matter which gave rise to the modification is
unresolved, and results in a modification of the auditor’s report regarding
the current period figures.
C. When the auditor’s report on the prior period, as previously issued, included
a modified opinion and the matter which gave rise to the modification is
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unresolved, but does not result in a modification of the auditor’s report

regarding the current period figures.
D. When the auditor’s report on the prior period financial statements
containing a material misstatement included an unmodified opinion and the
prior period financial statements have not been revised and reissued, and
the corresponding figures have not been properly restated and/or
appropriate disclosures have not been made.

232. According to PSA 710, the incoming auditor may refer to the predecessor
auditor’s report on the corresponding figures in the incoming auditor’s report
for the current period. The incoming auditor’s report should indicate
I. That the financial statements of the prior period were audited by another
auditor.
II. The type of report issued by the predecessor auditor.
III. The date of the predecessor auditor’s report.
A. I and II only. C. I and III only.
B. II and III only. D. I, II, and III.

233. When the prior period financial statements are not audited, the incoming
auditor should state in the auditor’s report that
I. The corresponding figures are unaudited.
II. The incoming auditor is not required to perform procedures regarding
opening balances of the current period.
A. I only C. Both I and II
B. II only D. Neither I nor II

234. J, CPA, audited JST Company’s prior-year financial statements. These

statements are presented with those of the current year for comparative
purposes without J’s auditor’s report, which expressed a qualified opinion. In
drafting the current year’s auditor’s report, S, CPA, the incoming auditor,
should
I. Not name J as the predecessor auditor.
II. Indicate the type of report issued by J.
III. Indicate the substantive reasons for J’s qualification.
IV. Indicate the date of J’s auditor’s report.
A. I, II, and IV only. C. I, II, and III only.
B. II, III, and IV only. D. I, II, III, and IV.

235. The predecessor auditor, who is satisfied after properly communicating with
the incoming auditor, has reissued his/her auditor’s report on prior year
financial statements. The predecessor auditor’s report should
A. Refer to the work of the incoming auditor in the scope and opinion
paragraphs.
B. Refer to the report of the incoming auditor only in the scope paragraph.
C. Refer to both the work and the report of the incoming auditor only in the
opinion paragraph.
D. Not refer to the report or the work of the incoming auditor.

236. The following statements relate to unaudited prior year financial statements
that are presented in comparative form with audited current year financial
statements. Which is incorrect?
A. The incoming auditor should state in the auditor’s report that the
comparative financial statements are unaudited.
B. The incoming auditor need not perform audit procedures regarding opening
balances of the current period.
C. Clear disclosure in the financial statements that the comparative financial
statements are unaudited is encouraged.
D. In situations where the incoming auditor identifies that the prior year
unaudited figures are materially misstated, the auditor should request

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management to revise the prior year’s figures or if management refuses to

do so, appropriately modify the report.

OTHER REPORTING RESPONSIBILITIES

237. Financial statements of an entity that have been reviewed by an accountant

should be accompanied by a report stating that a review
A. Provides only limited assurance that the financial statements are fairly
presented.
B. Includes examining, on a test basis, information that is the representation of
management.
C. Consists principally of inquiries of company personnel and analytical
procedures applied to financial data.
D. Does not contemplate obtaining corroborating evidential matter or applying
certain other procedures ordinarily performed during an audit.

238. An accountant’s report on a review of the financial statements of an entity

should state that the accountant
A. Does not express an opinion or any form of limited assurance on the
financial statements.
B. Conducted the review in accordance with the Philippine Standard on Review
Engagements.
C. Obtained reasonable assurance about whether the financial statements are
free of material misstatements.
D. Examined evidence, on a test basis, supporting the amounts and
disclosures in the financial statements.

239. Financial statements of an entity that have been reviewed by an accountant

should be accompanied by a report stating that
A. The scope of the inquiry and analytical procedures performed by the
accountant has not been restricted.
B. The financial statements are the responsibility of the company’s
management.
C. A review includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.
D. A review is greater in scope than a compilation, the objective of which is to
present financial statements that are free of material misstatements.
240. An accountant who reviews the financial statements of an entity should issue a
report stating that a review
A. Provides less assurance than an audit.
B. Provides negative assurance that internal control is functioning as designed.
C. Provides only limited assurance that the financial statements are fairly
presented.
D. Is substantially more in scope than a compilation.

241. When compiling the financial statements of an entity, an accountant should

A. Review agreements with financial institutions for restrictions on cash
balances.
B. Understand the accounting principles and practices of the entity’s industry.
C. Inquire of key personnel concerning related parties and subsequent events.
D. Perform ratio analyses of the financial data of comparable prior periods.

242. When compiling an entity’s financial statements, an accountant would be least

likely to
A. Perform analytical procedures designed to identify relationships that appear
to be unusual.
B. Read the compiled financial statements and consider whether they appear
to include adequate disclosure.
C. Obtain an acknowledgment from management of its responsibility for the
financial statements.
D. Plan the work so that an effective engagement will be performed.

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243. Which of the following should not be included in an accountant’s report based
upon the compilation of an entity’s financial statements?
A. A statement that a compilation of the company’s financial statements was
made in accordance with the Philippine Standard on Related Services
applicable to compilation engagements.
B. A statement that management is responsible for the financial statements.
C. A statement that the accountant has not audited or reviewed the
statements.
D. A statement that the accountant does not express an opinion but provides
only negative assurance on the statements.

244. Negative assurance may be expressed when an accountant is requested to

report agreed-upon procedures to specified
Elements of a Accounts of a
Financial Statement Financial Statement
A. Yes Yes
B. Yes No
C. No No
D. No Yes

245. An accountant may accept an engagement to apply agreed-upon procedures

that are not sufficient to express an opinion on one or more specified accounts
or items of a financial statement provided that
A. The accountant’s report does not enumerate the procedures performed.
B. The financial statements are prepared in accordance with a comprehensive
basis of accounting other than generally accepted accounting principles.
C. Distribution of the accountant’s report is restricted.
D. The accountant is also the entity’s continuing auditor.

246. Given one or more hypothetical assumptions, a responsible party may prepare,
to the best of its knowledge and belief, an entity’s expected financial position,
results of operations, and cash flows. Such prospective financial statements
are known as
A. Pro forma financial statements
B. Financial projections
C. Partial presentations
D. Financial forecasts

247. A financial forecast consists of prospective financial statements that present an

entity’s expected financial position, results of operations, and cash flows. A
forecast
A. Is based on the most conservative estimates.
B. Present estimates given one or more hypothetical assumptions.
C. Unlike a projection, may contain a range.
D. Is based on assumptions reflecting conditions expected to exist and courses
of action expected to be taken.

248. When an accountant examines prospective financial statements, the

accountant’s report should include a separate paragraph that
A. Contains an opinion as to whether the prospective financial statements are
properly prepared on the basis of the assumptions and are presented in
accordance with generally accepted accounting principles in the Philippines.
B. Provides an explanation of the differences between an examination and an
audit.
C. States that the accountant is responsible for events and circumstances up
to 1 year after the report’s date.
D. Disclaims an opinion on whether the assumptions provide a reasonable
basis for the prospective financial statements.

249. The following statements relate to the examination of prospective financial

information. Which is false?

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A. The auditor should express an opinion as to whether the results shown in

the prospective financial information will be achieved.
B. Before accepting an engagement to examine prospective financial
information, the auditor should consider the intended use of the
information.
C. The auditor should not accept, or should withdraw from, an engagement to
examine prospective financial information when the assumptions are clearly
unrealistic.
D. When in the auditor’s judgment an appropriate level of satisfaction has
been obtained, the auditor is not precluded from expressing positive
assurance regarding the assumptions.

250. Which of the following is a prospective financial information for general use
upon which an accountant may appropriately report?
A. Financial projection
B. Partial presentation
C. Pro forma financial statement
D. Financial forecast

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