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University of San Carlos

Accountancy Department
Auditing Theory Review By: TNCRestificar
Choose the most appropriate answer. Write the letter of your choice on the blanks provided on the
answer sheet. Please use CAPITAL letters. No erasures allowed.
1. A CPA-lawyer, acting as a legal counsel to one of his audit client, is an example of
a. Self-interest threat c. Advocacy threat
b. Self-review threat d. Familiarity threat

2. Which statement is incorrect regarding employed professional accountants?
a. Employed professional accountants owe a duty of loyalty to their employer as well as
to the profession, therefore there may be no time that the two will be in conflict.
b. A professional accountant, particularly one having authority over others, should give
due weight for the need for them to develop and hold their own judgment in accounting
matters and should deal with difference of opinion in a professional way.
c. When undertaking significant tasks for which a professional accountant has not had
sufficient specific training or experience, he or she should not mislead the employer as
to the degree of expertise or experience he or she possesses, and where appropriate,
expert advice and assistance should be sought.
d. A professional accountant is expected to present financial information fully, honestly
and professionally and so that it will be understood in its context.

3. The objectives of the Accountancy Act of 2004 includes all of the following except
a. Examination for registration of CPAs;
b. Supervision, control and regulation of accounting practice;
c. Standardization and regulation of accounting education; and
d. Design, installation and review of accounting systems and controls.

4. Which of the following is not one of the penalties that can be imposed by the BOA?
a. Fine or imprisonment
b. Revocation of CPA certificate
c. Reprimand
d. Suspension of CPA certificate

5. A body that is created through the Philippine Accountancy Act of 2004 that intended to
replace the Auditing Standard and Practice Council (ASPC)?
a. Auditing and assurance Standards Council
b. International Financial Reporting Standards Council
c. American Institute of Certified Public Accountants
d. Philippine Institute of Certified Public Accountants

6. A person whose CPA certificate has been revoked?
a. Can no longer be reinstated as a CPA
b. Is reinstated as a CPA after two years if he has applied for it through PICPA
c. May be reinstated as a CPA by the Board of Accountancy after two years if he has
acted in an exemplary manner.
d. May be reinstated by the PRC after two years if he has acted in an exemplary manner.

7. Which of the following is NOT part of the fundamental principles of the Code?
a. Confidentiality
b. Objectivity
c. Completeness
d. Professional behavior

8. The Code would be violated if a member accepted a fee for services and the fee was
a. Fixed by a public authority
b. Based on a price quotation submitted in competitive bidding
c. Based on the result of judicial proceedings
d. Payable after a specified finding was attained

9. The attainment of professional competence requires the following EXCEPT
a. High standard of general education;
b. Training and examination in professional relevant subjects;
c. A period of work experience, whether prescribed or not; and
d. Possessing the ability to act with integrity and objectivity.

10. The following are part of the resolution process when a professional accountant initiate
either a formal or informal conflict resolution process, EXCEPT
a. Relevant facts
b. Communicate misleading statements
c. Established internal procedures
d. Ethical issues involved

11. Match each of the listed practices and provisions with the fundamental principles of the
Code.
A. Integrity
B. Objectivity
C. Professional competence and due care
D. Confidentiality
E. Professional behavior

______ a. A professional accountant should comply with relevant laws and regulations
and should avoid any action that discredits the profession. E
_____ b. A professional accountant has a continuing duty to maintain professional
knowledge and skill at the level required to ensure that a client or employer
receives competent professional service based on current developments in
practice, legislation and techniques. C
_____ c. A professional accountant should not allow bias, conflict of interest or undue
influence of others to override professional or business judgments. B
_____ d. A professional accountant should not disclose any information to third parties
without proper and specific authority unless there is a legal or professional right
or duty to disclose. D
_____ e. A professional accountant should be straightforward and honest in all
professional and business relationships. A

12. Which of the following is an element of a CPA firm's quality control policies and
procedures applicable to the firm's accounting and auditing practice?
a. Information processing.
b. Engagement performance.
c. Technology selection.
d. Professional skepticism.

13. Which of the following statements best describes why the CPA profession has deemed it
essential to promulgate ethical standards and to establish means for ensuring their
observance?
a. A requirement for a profession is the establishment of ethical standards that stress
primarily a responsibility to clients and colleagues.
b. A requirement of most state laws calls for the profession to establish a code of
ethics.
c.An essential means of self-protection for the profession is the establishment of
flexible ethical standards by the profession.
d.A distinguishing mark of a profession is its acceptance of responsibility to the public.

14. In determining estimates of fees, an auditor may take into account each of the following,
EXCEPT
a. Value of the service to the client.
b. Degree of responsibility assumed by undertaking the
engagement.
c. Skills required to perform the service.
d. Attainment of specific findings.




Match each of the following actions with the Code of Conduct rule violated by the action.
No rule is used more than once.

A. Independence
B. Integrity and objectivity
C. General standards
D. Compliance with standards
E. Accounting principles
F. Confidential client information
G. Contingent fees
H. Advertising and other forms of solicitation

____15. Ju Dy, CPA, refused to be associated with a clients financial statements after
the client declined to correct a material misstatement. Ju later contacted Audi Thor,
CPA, retained by the client to replace Ju, and informed Audi of the
misstatement. F

____16. Dandan Soy, CPA, agreed to review loan applications for Philippine National Bank,
an audit client. The bank granted or denied the loans on the basis of Lopez
recommendations. A

___ 17. In defense of a lawsuit alleging negligence, Melissa Ann, CPA, explained that she
was not an expert in commodities trading and therefore did not detect the accounting
fraud perpetrated by her client, a commodities broker. C

____ 18. Kim Chu, CPA, accepted an audit engagement for a fixed fee of $27,000 plus 1%
of audited net assets. G

_____19. Ben Chan, CPA, issued an unqualified opinion on a set of financial statements,
even though he felt uncomfortable about an accounting practice applied by the client.
Although the practice in question was in accordance with GAAP, it increased net
income significantly above a level that Williams considered reasonable. B

____ 20. Jones Transfer Company wishes to defer charging certain research and development
expenditures to current income on the basis that the expenditures are virtually certain
to benefit future operations. For this reason, Jack Risher, CPA and Jones auditor,
agrees with the proposed accounting treatment. E

16. Whether a particular engagement is an assurance engagement will depend upon whether it
exhibits all the following elements, including:
i. A three party relationship involving a professional accountant, a responsible party, and an
intended user
ii. A subject matter
iii. A suitable criteria
iv. An engagement process
v. A conclusion

a. I, II, III, IV and V c. I, II, and III
b. I, II, III and V d. I, II, III and IV

17. When the safeguards available are insufficient to eliminate the threats to independence or
to reduce them to an acceptable level, or when a firm chooses not to eliminate the activities
or interest creating the threat, the only course of action available will be the
a. Issuance of an adverse opinion.
b. Issuance of qualified opinion or disclaimer of opinion.
c. Issuance of unqualified opinion with explanatory paragraph.
d. Refusal to perform, or withdrawal from, the assurance engagement.





18. A threat which may occur when a previous judgement needs to be re-evaluated by the
professional accountants responsible for that judgement.
a. Self-interest threats c. Self-review threats
b.Advocacy threats d. Intimidation threats

19. A threat which may occur, when because of a close relationship, a professional accountant
becomes too sympathetic to the interests of others.
a. Self-interest threats c. Self-review threats
b. Familiarity threats d. Intimidation threats

20. A CPA, while performing an audit, strives to achieve independence in appearance in order
to
a. Reduce risk and liability.
b. Comply with the generally accepted standards of field work.
c. Become independent in fact.
d.Maintain public confidence in the profession.

21. CPA establishes quality control policies and procedures for deciding whether to accept a
new client or continue to perform services for a current client. The primary purpose for
establishing such policies and procedures is
a. To enable the auditor to attest to the integrity or reliability of a client.
b. To comply with the quality control standards established by regulatory bodies.
c. To lessen the exposure to litigation resulting from failure to detect irregularities in
client financial statements.
d.To minimize the likelihood of association with clients whose management
lacks integrity.

22. Which of the following is not an element of quality control?
a. Documentation c. Supervision
b. Inspection. d. Consultation.

23.Which of the following is not a requisite in applying for the CPA licensure examinations?
a. Natural-born citizen of the Philippines.
b. Good moral character.
c. Holder of the degree of Bachelor of Science in Accountancy.
d.Has not been convicted of any criminal offense involving moral turpitude.


24.Are the following CPAs required to comply with the requirements on continuing professional
education?
a b c d
CPAs in Public Accountancy Yes Yes Yes Yes
CPAs in Commerce and Industry Yes Yes No No
CPAs in Education/Academe Yes Yes Yes No
CPAs in Government Yes No Yes No

25. Which one of the following is more difficult to evaluate objectively?
a. Efficiency and effectiveness of operations.
b. Compliance with government regulations.
c. Presentation of financial statements in accordance with generally accepted accounting
principles.
d. All three of the above are equally difficult..

26. How many CPE credit units must be accumulated by a registered accounting professional
within the 3-year period?
a. 15 credit units b. 45 credit units c. 60 credit units d. 90 credit units

27. 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 clients financial statements may most likely create
a. Self-interest threat c. Intimidation threat
b. Self-review threat d. Familiarity threat


28. The CPA should not undertake an engagement if his fee is to be based upon
a. A percentage of audited net income.
b. Per diem rates plus expenses.
c. The findings of a tax authority.
d. The complexity of the service rendered

29. Which of the following is not represented in the Auditing and Assurance Standards Council?
a. Board of Accountancy c. Bureau of Internal Revenue
b. Bangko Sentral ng Pilipinas d. Securities and Exchange Commission

30. Pating, CPA is applying for renewal of his professional license. He is exempted from the
CPE requirements
a. If he is at least 65 years old.
b. If he is working abroad and he has been out of the country for at least two years
immediately prior to the date of renewal.
c. Either a or b.
d. Under no circumstances

31.The following definitions from the IFAC Code were modified to consider Philippine
regulatory requirements and circumstances, except
a. Firm
b. Professional accountants in public practice
c. Professional accountants
d. Lead engagement partner

32. A combination of impartiality, intellectual honesty and a freedom from conflicts of interest.
a. Objectivity c. Professional skepticism
b. Independence of mind d. Professional competence

33.The following are modifications to the IFAC Code to consider Philippine regulatory
requirements and circumstances, EXCEPT
a. The period for rotation of the lead engagement partner was changed from five to seven
years.
b. Advertising and solicitation by individual professional accountants in public practice
were not permitted in the Philippines.
c. Additional examples relating to anniversaries and websites wherein publicity is
acceptable, as provided in BOA Resolution 19, Series of 2000, were included.
d. Payment and receipt of commissions were not permitted in the Philippines

34. Independence is potentially affected by
I. Self-interest threat IV. Familiarity threat
II. Self-review threat V. Intimidation threat
III. Advocacy threat
a. I, II, III, IV and V c. I, II and III
b. I, II, III and IV d. I only

35. Which of the following is not normally a service rendered by public accountants?
a. Management consultation service c. Internal auditing
b. Attest function d. Taxation

36 The government agency tasked by law of implementing and enforcing the regulatory
policies of the national government with respect to the regulation and licensing of
the various professions and occupations under its jurisdiction is
a. PRC b. BOA c. COA d. SEC

37. A body that is created through the Philippine Accountancy Act of 2004 and is intended
to replace the ASPC.
a. Auditing and Assurance Standards Council (AASC)
b. Financial Reporting Standards Council (FRSC)
c. Education Technical Council (ETC)
d. Philippine Institute of Certified Public Accountants (PICPA)


38. Indicate whether the following functions would be performed by:
P Partner S Senior
M Manager AS Audit Assistant
(1) Supervises two or more concurrent audit engagements
(2) Performs detailed audit procedures
(3) Overall responsibility for audit
(4) Signs audit report
(1) (2) (3) (4)
a. P AS S M
b. M S M P
c. M AS P P
d. P AS S M

39. The BOA shall submit to the PRC the ratings obtained by each candidate within how many
calendar days after the examination?
a. 5 days b. 10 days c. 15 days d. 30 days

40. The Board shall exercise the following specific powers, functions and responsibilities:
a b c d
To supervise the registration, licensure and
practice of accountancy

Yes

Yes

Yes

Yes
To issue, suspend, revoke, or reinstate the
Certificate of Registration for the practice of
the accountancy profession


Yes


No


Yes


Yes
To monitor the conditions affecting the
practice of accountancy

Yes

Yes

No

Yes
To conduct an oversight into the quality of
audits of financial statements

Yes

No

Yes

No
To issue a cease or desist order to any person,
association, partnership or corporation
engaged in violation of any provision of the
Act


Yes


Yes


No


Yes

41. A body that is created to assist the BOA in the attainment of the objective of continuously
upgrading the accountancy education in the Philippines to make the Filipino CPAs
globally competitive.
a. Philippine Institute of Certified Public Accountants (PICPA)
b. Education Technical Council (ETC)
c. Financial Reporting Standards Council (FRSC)
d. Associations of CPAs in Education (ACPAE)

42. The PICPA shall renew its Certificate of Accreditation once every how many years after the
date of the Resolution granting the petition for re-accreditation and the issuance of the said
certificate upon submission of the requirements?
a. 2 years b. 3 years c. 4 years d. 6 years

43. Below are the names of three 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 firm name and related facts indicates a violation of the IRR of RA 9298?
a. Joyce, Ara and Angela, CPAs (Joyce died about 10 years ago, Ara and Angela are
continuing the firm)
b. Lupin and Fujico, CPAs ( the name of Goymon a third active partner is omitted in the
firm name)
c. Hugo and Pugo, CPAs (Hugo died 25 months ago, Pugo is continuing the firm as a sole
proprietor)
d. Bubu and Bibi, CPAs (Bibi died 3 years ago, Bobot was admitted into the partnership 2
months after Bibis death.)





44. Quality control policies and procedures that are established to decide whether to accept a
new client should provide the CPA firm with reasonable assurance that:
a. The CPA firm's duty to the public concerning the acceptance of new clients is satisfied.
b. The likelihood of associating with clients whose management lacks integrity is
minimized.
a. Client-prepared schedules that are necessary for the engagement are completed on a
timely basis.
b. Sufficient corroborating evidence to support the financial statement assertions is
available.
ANSWER:
Choice "b" is correct. Quality control policies and procedures that are established to decide whether to
accept a new client should provide the CPA firm with reasonable assurance that the likelihood of
associating with clients whose management lacks integrity is minimize

45. Because an examination in accordance with generally accepted auditing standards is
influenced by the possibility of material errors, the auditor should conduct the examination
with an attitude of
a. Professional responsiveness c. Objective judgment
b. Conservative advocacy d. Professional skepticism

46. An audit can have a significant effect on
a. Information Risk c. Business Risk
b. The risk-free interest rate d. All of these

47. Which of the following is a correct statement relating to the theoretical framework of
auditing?
a. The financial data to be audited can be verified.
b. Short-term conflicts do not exist between managers who prepare data and auditors
who examine data.
c. Auditors do not necessarily need independence.
d. An audit has a benefit only to the owners.

48. Which of the following best describes what is meant by generally accepted auditing
standards?
a. Audit objectives generally determined on audit engagements.
b. Acts to be performed by the auditor.
c. Measures of the quality of the auditor's performance.
d. Procedures to be used to gather evidence to support financial statements.

49. The first general standard requires that a person or persons have adequate technical
training and proficiency as an auditor. This standard is met by
a. An understanding of the field of business and finance.
b. Education and experience in the field of auditing.
c. Continuing professional education.
d. A thorough knowledge of the Statements on Auditing Standards.

50. A basic objective of a CPA firm is to provide professional services that conform with
professional standards. Reasonable assurance of achieving this basic objective is provided
through
a. A system of peer review.
b. Continuing professional education.
c. A system of quality control.
d. Compliance with generally accepted reporting standards.

51. The single feature that most clearly distinguishes auditing, attestation, and assurance is
a. Type of service.
b. Training required to perform the service.
c. Scope of services.
d. CPAs approach to the service.




52. The primary goal of the CPA in performing the attest function is to
a. Detect fraud.
b. Examine individual transactions so that the auditor may certify as to their
validity.
c. Determine whether the client's assertions are fairly stated.
d. Assure the consistent application of correct accounting procedures.

53. As used in auditing, which of the following statements best describes "assertions"?
a. Assertions are the representations of management as to the reliability of the information
system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial
statements.
d. Assertions are found only in the footnotes to the financial statements.

54. It refers to the level of auditors satisfaction as to the reliability of an assertion being made
by one party for use by another party.
a. Confidence level c. Assurance level
b. Reasonableness level d. Tolerable level

55. Indicate the level of assurance provided by audit and related services.
a b c d
Audit High High Negative Absolute
Review Moderate None Moderate High
Agreed-upon procedures None None None Limited
Compilation None None None None

56. Which of the following is true of the report based on agreed-upon-procedures?
a. The report is restricted to those parties who have agreed to the procedures to be
performed.
b. The CPA provides the recipients of the report limited assurance as to reasonableness of
the assertion(s) presented in the financial information.
c. The report states that the auditor has not recognized any basis that requires revision of
financial statements.
d. The report should state that the procedures performed are limited to analytical
procedures and inquiry.

57. According to Philippine Standard on Auditing, the procedures employed in doing
compilation are:
a. Designed to enable the accountant to express a limited assurance.
b. Designed to enable the accountant to express a negative assurance.
c. Not designed to enable the accountant to express any form of assurance.
d. Less extensive than review procedures but more extensive than agreed-upon
Procedures.

58. Assurance engagement
a. Is an engagement in which a practitioner is engaged to issue, or does issue, a written
communication that expresses a conclusion about the reliability of a written assertion
that is the responsibility of another party.
b. Is a systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence
between those assertions and established criteria and communicating the results to
interested users.
c. Is an engagement in which the auditor provides a moderate level of assurance that the
information subject to the engagement is free of material misstatement.
d. Is an engagement intended to enhance the credibility of information about a subject
matter by evaluating whether the subject matter conforms in all material respects with
suitable criteria, thereby improving the likelihood that the information will meet the
needs of an intended user.







Matching:
Match each type of evidence-gathering methods of auditing with the listed different areas
in audit:
a. compliance audit
b. management audit
c. performance audit
d. forensic audit
e. operational audit
f. internal audit
g. environmental audit
h. comprehensive audit

_____ 59. Refers to the examination of evidence regarding an assertion to established
criteria carried out in a manner suitable to the court. D
_____ 60. An independent, objective assurance and consulting activity designed to add
value and improve an organizations operations. F
_____ 61. Includes the components of compliance, performance and financial statements
audit. H
_____ 62. An examination and evaluation of the activities of management. B
_____ 63. Conducted in order to determine managerial performance as to efficiency,
effectiveness and economy. C
_____ 64. Conducted to determine compliance with criteria, standards set by
an authoritative body. A
_____ 65. Performed to determine if organizations operating activities is functioning
efficiently and effectively. E

66. Which of the following best describes the character of the three generally accepted auditing
standards classified as general standards?
a. Criteria for competence, independence, and professional care of
individuals performing the audit.
b. Criteria for the content of the financial statements and related footnote disclosures.
c. Criteria for the content of the auditor's report.
d. The requirements for planning and supervision.

67. the generally accepted standards of filed work relate to
a. The competence, independence, and professional care of persons performing the
audit.
b. Criteria for the content of the auditor's report on financial statements.
c. Audit planning and evidence gathering.
d. The need to maintain independence in mental attitude.

68. Which of the following statements is correct concerning the concept of materiality?
a. Materiality is determined by reference to AICPA guidelines.
b. Materiality depends only on the dollar amount involved.
c. Materiality depends on the nature of an item rather than on the dollar amount.
d. Materiality is a matter of professional judgment.

69. Identify the following as financial audit (FA), compliance audit (CA), and operational audit
(OA).
A supervisor is not carrying out his assigned responsibilities.
A companys tax return does not conform to income tax laws and regulations.
A municipalitys financial statements correctly show actual cash receipts and
disbursements.
A companys receiving department is inefficient.

a. CA, CA, FA, OA c. OA, CA, FA, OA
b. OA, CA, CA, OA d. CA, CA, FA, CA



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

71. There are fundamental principles that the professional accountant has to observe when
performing assurance engagements. The requirement of which principle is of particular
importance in an assurance engagement in ensuring that the conclusion of the professional
accountant has value to the intended user?
a. Integrity c. Confidentiality
b. Professional competence d. Objectivity

72. According to PSA 120, which of the following is an appropriate combination of procedures
required in completing a review engagement?
a. Inquiry and observation
b. Inquiry and analytical procedures
c. Analytical procedures and inspection
d. Observation and analytical procedures

73. Which statement is correct regarding related services?
a. Related services comprise reviews, agreed-upon procedures and consultancy.
b. Audits and reviews are designed to enable the auditor to provide high level assurance.
c. Engagement to undertake agreed-upon procedures is not intended to enable the auditor to
express assurance.
d. In a consultancy engagement, the accountant is engaged to use accounting expertise as
opposed to auditing expertise to collect, classify and summarize financial information.

74. Which of the following is least likely an application of maintaining an attitude of
professional skepticism?
a. The auditor does not consider representations from management as substitute for
obtaining sufficient appropriate audit evidence to be able to draw reasonable conclusions
on which to base the audit opinion.
b. In planning and performing an audit, the auditor assumes that management is dishonest.
c. The auditor is alert to audit evidence that contradicts or brings into question the reliability
of documents or management representations.
d. The auditor makes a critical assessment, with a questioning mind, of the validity of audit
evidence obtained.

75. A public accounting firms primary role in performing non-attest services is to:
a. Hedge against declines in the firms audit practice.
b. Establish the firm as a consultant.
c. Provide advice valuable to the clients effectiveness.
d. Acclimate staff members to the clients business and industry.

76. Which of the following best describes high level of assurance?
a. It refers to the professional accountant having obtained evidence based on procedures
agreed upon between the practitioner and the intended users to be satisfied that findings
be reported to the intended users.
b. It refers to the professional accountant having obtained sufficient external and internal
appropriate evidence to be satisfied that the subject matter is plausible in the
circumstances.
c. It refers to the professional accountant having obtained sufficient appropriate evidence to
conclude that the subject matter conforms in all material respects with identified suitable
criteria.
d. It refers to the professional accountant having obtained sufficient evidence to conclude
that he has no knowledge of any required modifications to be made in the financial
statements in order for them to conform of prescribed criteria.

77. Which statement is incorrect regarding assurance engagement risk?
a. Engagement risk is the risk that the practitioner will express an inappropriate conclusion
that the subject matter conforms in all material respects with suitable criteria.
b. All components of the engagement risk model will be significant for all assurance
engagements.

c. The extent to which the practitioner considers the relevant components of engagement
risk will be affected by the engagement circumstances.
d. Business risk is not part of engagement risk and does not affect the application of
Philippine Standard on Assurance Engagements.

78. Which statement is incorrect regarding an engagement to perform agreed-upon procedures?
a. An auditor is engaged to carry out those procedures of an audit nature to which the
auditor and the entity and any appropriate third parties have agreed and to report on
factual findings.
b. The recipients of the report must form their own conclusions from the report by the
auditor.
c. The report is restricted to those parties that have agreed to the procedures to be
performed.
d. The report on factual findings is expressed in the form of negative assurance.

79. Which of the following engagements provides third parties the highest level of assurance
about the clients financial statements?
a. Audit c. Agreed-upon procedures
b. Review d. Compilation

80. In which of the following situations can third parties assume responsibility of the auditor
regarding association with financial information?
a. When the auditor attaches a report to that information.
b. When the auditor consents to the use of the auditor's name in a professional connection.
c. Either a or b.
d. Neither a nor b.

81. Which statement is incorrect regarding the external auditors consideration of the work of
internal auditing?
a. The external auditor should consider the activities of internal auditing and their effect, if
any, on external audit procedures.
b. The external auditor should obtain a sufficient understanding of internal audit activities to
assist in planning the audit and developing an effective audit approach.
c. During the course of planning the audit, the external auditor should perform a preliminary
assessment of the internal audit function when it appears that internal auditing is relevant
to the external audit of the financial statements in specific audit areas.
d. When the external auditor intends to use specific work of internal auditing, the external
auditor need not evaluate and test that work to confirm its adequacy for the external
auditor's purposes.
82. The purpose of the requirement of PSA 220(rev) of having communication between the
predecessor and successor auditor is
a. To allow predecessor to disclose information which would otherwise be confidential
b.To ensure that information which is provided to the SEC will be accurate
c.To help the successor auditor to evaluate whether to accept the engagement
c. To help the client by facilitating the change of auditors

83. When a company changes auditor, auditing and quality control standards require
communication between the predecessor and successor auditors. The burden of initiating the
communication rests with the
a. Client
b.Predecessor
c. Successor
d.SEC

84. Planning the audit requires which of the following
a. Developing an understanding of audit risk and materiality.
b. Anticipating financial statement items likely to need adjustment.
c. Determining the type of report to be issued.
d. A and B only.
e. All of the above



85. . Which of the following procedures would an auditor most likely perform when
planning an audit?
a. Review prior-year audit working papers.
b. Inquire about potential litigation, claims, and assessments.
c. Obtain a representation letter from management.
d. Determine whether internal controls are being applied as prescribed.

86. A purpose of reviewing first quarter financial results during audit planning is to:
a. Identify unexpected fluctuation occurring in account balances since the prior-year financial
statements.
b. Become familiar with accounts likely to appear in the financial statements.
c. Plan evidence to be gathered in auditing accounts that are new to the first quarter financial
statements.
d. Assess first quarter financial position, results of operations, and cash flows.

86. It refers to a partner, other person in the firm, suitably qualified external person, or a team
made up of such individuals, with sufficient and appropriate experience and authority to
objectively evaluate, before the report is issued, the significant judgments the engagement
team made and the conclusions they reached in formulating the report.
a. engagement partner
b. expert
c. engagement quality control reviewer
d. engagement team

87. The following are elements of system of quality control, except:
a. internal control
b. ethical requirements
c. human resources
d. monitoring

88. Who is to assume ultimate responsibility for the firm's system of quality control?
a. Chief Executive Officer
b. Managing Partner
c. Both a and b
d. Some other answer

89. This means determining whether quality controls are relevant, adequate, operating effectively
and complied within practice.
a. Consultation
b. Engagement Quality Control Review
c. Engagement Performance
d. Monitoring

90. Policies and procedures on documentation of the engagement quality control review should
require documentation that:
a. review policies have been performed;
b. The engagement quality control review has been completed before the report is issued;
and
c. The reviewer is not aware of any unresolved significant matters
d. All of the above.

91.With regard to the integrity of a client, this matter is not considered by the firm
a. The identity and business reputation of the clients principal owners, key
management, related parties and those charged with its governance.
b. The nature of the clients operations, including its business practices.
c. Unexperienced personnel hired by the client
d. Indications that the client might be involved in money laundering or other criminal
activities.





92. You have been engaged to perform the audit of Wa-Il Corporations financial statements.
When planning such an audit, you often may need to refer to various professions auditing
standards.

Required: For each of the following circumstances below, select the title of the Philippine
Standards on Auditing (PSA) that is likely to provide the most guidance in the planning of
the audit. A PSA may be selected once, more than once, or not at all.

E ___1. Relates the identified risk to what can go wrong at the assertion level.
B ___2. The relationship between materiality and audit risk used for planning purposes.
A ___3. Comparing a clients unaudited results for the year with last years audited results
C ___ 4. Acceptance and continuance of client relationships and specific audit engagements
F ___ 5. Wa-Il Corp. has transactions with the corporation presidents brother.
D ___ 6. Consider whether an identified misstatement may be indicative of fraud.
H ___ 7. The greater the risk of material misstatement, the more audit evidence the auditor
obtains that relevant controls are operating effectively.

Philippine Standard on Auditing
A. PSA 520, Analytical Procedures
B. PSA 320, Audit Materiality
C. PSA 220, Quality Control for Audits of Historical Financial Information
D. PSA 240, The Auditors Responsibility to Consider Fraud in an Audit of Financial Statements
E. PSA 315, Understanding the Entity and its Environment and Assessing the Risks of Material
Misstatement
F. PSA 550, Related Parties
G. PSA 600, Using the Work of Another Auditor
H. PSA 330, Auditors Procedures in Response to Assessed Risk

Fill-in the blanks. Choose your answer from the auditing terms listed inside the box. Write on
your answer sheet the most appropriate word or phrase that completes the sentence. The
answer may be used only once.

Audit documentation audit program scope of an audit
Rationalization audit documentation detection risk
Network firm audit planning management
agreed-upon procedures incentive Criteria
Engagement quality control review engagement letter
Fraud misappropriation of assets

93. _________________________ involves the theft of an entitys assets and is often perpetrated
by employees in relatively small and immaterial amounts.
Misappropriation of assets
94. _________________ is the stage of the audit process that involves developing a general audit
strategy and detailed audit approach for the expected nature, timing and extent of the audit.
Audit planning
95. ____________ is responsible for the identification and disclosure of related parties and
transactions with such parties.
management
96. ____________ is a process designed to provide an objective evaluation, before the auditors
report is issued, of the significant judgments the engagement team made and the conclusions
they reached in formulating the auditors report.
engagement quality control review
97. ___________________ documents and confirms the auditors acceptance of the appointment,
the objective and scope of the audit, the extent of the auditors responsibilities to the client and
the form of any reports.
Engagement letter


98. ____________ is an entity under common control, ownership or management with the firm
or any entity that a reasonable and informed third party having knowledge of all relevant
information would reasonably conclude as being part of the firm nationally or internationally.
network firm
99. ____________ means the record of audit procedures performed, relevant audit evidence
obtained, and conclusions the auditor reached.
audit documentation
100. The term ____________ refers to the audit procedures deemed necessary in the
circumstances to achieve the objective of the audit.
scope of an audit
101. _________________ serves as a set of instruction to assistants involved in the audit and as a
means of control and record the proper execution of the work.
Audit program
102. ____________ is the risk that the practitioner will not detect a material misstatement that
exists.
detection risk
103. The granting of significant bonuses if unrealistic profit targets are met may create a/an
____________ to commit fraud.
incentive
104. Everyone else is doing it, so it cannot be that wrong, is one kind of ________________ that
fraud perpetrators use in justifying their improper behavior. Rationalization

105. In testing the existence assertion for an asset, an auditor ordinarily works from the
a. Financial statements to the potentially unrecorded items.
b. Potentially unrecorded items to the financial statements.
c. Accounting records to the supporting evidence.
d. Supporting evidence to the accounting records.

106. On the basis of the audit evidence gathered and evaluated, an auditor decides to increase
the assessed level of control risk from that originally planned. To achieve an overall audit
risk level that is substantially the same as the planned audit risk level, the auditor would
a. Decrease substantive testing.
b. Decrease detection risk.
c. Increase inherent risk.
d. Increase materiality level

107. Investigation of new clients and reevaluation of existing ones is an essential part of
detecting
a. Acceptable audit risk
b. Inherent risk
c. Financial risk
d. Statistical risk

108. Which of the following statements is true with regard to the relationship among audit
risk, audit evidence, and materiality?
a.The lower the inherent risk and control risk, the lower the aggregate materiality threshold.
b.Under conditions of high inherent and control risk, the auditor should place more emphasis
on obtaining external evidence and should reduce reliance on internal evidence.
c. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent
risk.
d.Aggregate materiality thresholds should not change under conditions of changing risk
levels.

109. The auditor notices significant fluctuations in key elements of the company's financial
statements. If management is unable to provide an acceptable explanation, the auditor
should
a. Consider the matter a scope limitation.
b. Perform additional audit procedures to investigate the matter further.
c. Intensify the examination with the expectation of detecting management fraud.
d. Withdraw from the engagement.


110. Which of the following statements concerning materiality thresholds is incorrect?
a. Aggregate materiality thresholds are a function of the auditor's preliminary judgments
concerning audit risk.
b. In general, the more misstatements the auditor expects, the higher should be the
aggregate
materiality threshold.
c. The smallest aggregate level of errors or fraud that could be considered material to any
one of the financial statements is referred to as a "materiality threshold."
d. Materiality thresholds may change between the planning and review stages of the
audit. These changes may be due to quantitative and/or qualitative factors.

111. Significant unexpected fluctuations identified by analytical procedures will usually
necessitate a(an)
a. Consistency qualification.
b. Review of internal control.
c. Explanation in the representation letter.
d. Auditor investigation.

112. . Audit engagement letters generally include reference to the following except
a. objective of the audit of financial statements
b. managements responsibility for the financial statements
c. scope of the audit
d. identification of the audit team members

113. An audit teams responsibility would not include
a. designing an effective control structure.
b. documentation of understanding of internal control structure.
c. communicating reportable conditions on internal control structure.
d. an evaluation of existing internal control structure.

114. The four major steps in conducting an audit are:
a. Testing internal controls
b. Audit report
c. Planning
d. Testing transactions and balances

The proper sequence in applying the above steps is:
a. cadb
b. cdab
c. bcda
d. adcb

115 Which of the following best describes the purpose of the engagement letter?
a. The engagement letter relieves the auditor of some responsibility for the exercise
of due care.
b. By clearly defining the nature of the engagement, the engagement letter helps to
avoid and resolve misunderstandings between CPA and client regarding the
precise nature of the work to be performed and the type of report to be issued.
c. The engagement letter conveys to management the detailed steps to be applied in
the audit process.
d. The engagement letter should be signed by both the client and the CPA and
should be used only for independent audits.

116. In assessing audit risk, the CPA needs to do all of the following EXCEPT
a. Gather audit evidence in support of recorded transactions.
b. Obtain an understanding of the client's system of internal control.
c. Understand the economic substance of significant transactions completed by the
client.
d. Understand the entity and the industry in which it operates.



COMPLETION

117. An audit approach that attempts to identify areas posing the highest probability of
financial statement errors and allocate audit resources to those areas is known as
_________ - ___________ auditing.
Ans. Risk-based

118. The assertion stating that no assets, equities, or transactions have been omitted from the
financial statements is known as the ____________ assertion.
Ans:. completeness
119. ___________________ an engagement in which a practitioner expresses a
conclusion designed to enhance the degree of confidence of the intended users other than
the responsible party about the outcome of the evaluation or measurement of a subject
matter against criteria.
Ans: Assurance engagement

120. __________________ are the benchmarks used to evaluate or measure the subject matter
including, where relevant, benchmarks for presentation and disclosure
Ans: Criteria

121. An attitude of ___________ _____________ means the practitioner makes a critical
assessment, with a questioning mind, of the validity of evidence obtained and is alert to
evidence that contradicts or brings into question the reliability of documents
or representations by the responsible party
Ans. Professional skepticism

122. ____________ a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between the assertions and established criteria and communicating
the results to interested users.
Ans: Auditing

123. In conducting a fraud investigation the auditor should first:
a. Identify the perpetrators
b. Obtain the facts
c. Obtain a confession
d. Notify a law enforcement agency

124. Prior to acceptance of the engagement, the successor auditor is required to
a. Obtain the prospective clients signature on the engagement letter.
b. Prepare a memorandum setting forth the staffing requirements and documenting the
preliminary audit plan.
c. Make inquiries of the predecessor auditor after obtaining the consent of the prospective
client.
d. Discuss the management representation letter with the prospective clients audit
committee.

125. A well-established CPA firm establishes quality control policies and procedures for deciding
whether or not to accept or continue serving a client. The primary purpose for establishing
such quality control is
a. To enable the auditor to attest to the reliability of a client.
b. To minimize the likelihood of associating with clients whose management lacks integrity.
c. To comply with standards established within the industry.
d. To lessen exposure to litigation for failure to detect fraud or embezzlement.

126. A concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that
there are no material misstatements in the financial statements taken as a whole.
a. Reasonable assurance c. Moderate assurance
b. Positive assurance d. Negative assurance





127. Which of the following statements is not a distinction between independent auditing and
internal auditing?
a. Independent auditors represent third party users
external to the auditee entity, whereas internal auditors report directly to
management.
b. Although independent auditors strive for both validity and relevance of evidence,
internal auditors are concerned almost exclusively with validity.
c. Internal auditors are employees of the auditee, whereas independent auditors are
independent contractors.
d. The internal auditor's span of coverage goes beyond financial auditing to encompass
operational and performance auditing.

128.. Which of the following best describes the purpose of the engagement letter?
a. The engagement letter relieves the auditor of some responsibility for the exercise
of due care.
b. By clearly defining the nature of the engagement, the engagement letter helps to
avoid and resolve misunderstandings between CPA and client regarding the
precise nature of the work to be performed and the type of report to be issued.
c. The engagement letter conveys to management the detailed steps to be applied in
the audit process.
d. The engagement letter should be signed by both the client and the CPA and
should be used only for independent audits.

129. In assessing audit risk, the CPA needs to do all of the following except
a. Gather audit evidence in support of recorded transactions.
b. Obtain an understanding of the client's system of internal control.
c. Understand the economic substance of significant transactions completed by the
client.
d. Understand the entity and the industry in which it operates.

MATCHING:

Match each of the listed procedures with the primary assertion that is satisfied by the procedure
a. existence or occurrence
b. completeness
c. rights and obligations
d. valuation or allocation
e. presentation and disclosure

____ 130. Calculated depreciation expense for the year D

____ 131. Test counted clients year end inventory of materials and finished goods A

____ 132. Examined vehicle title applicable to new truck purchased during the current year C

____ 133. Considered need for a footnote describing a lawsuit pending against the client E

____ 134. Conducted a search for unrecorded liabilities B

____ 135. Advised client of the need to reclassify the current portion of a long term mortgage
note. E

____ 136. Performed tests to determine that overhead had been properly applied to ending
inventory and cost of sales. D

____ 137. Reconciled clients bank accounts as of year end D

____ 138. Examined appraisal reports applicable to land donated by the city D

____ 139. Obtained written confirmation from customers regarding year end balances in
selected accounts receivable. D


140. Which of the following should an auditor obtain from the predecessor auditor prior to
accepting an audit engagement?
a. Analysis of balance sheet accounts.
b. Analysis of income statement accounts.
c. All matters of continuing accounting significance.
d. Facts that might bear on the integrity of management.

141. With respect to errors and fraud, which of the following should be part of an auditor's
planning of the audit engagement?
a. Plan to search for errors or fraud that would have a material or immaterial effect on
the financial statements.
b. Plan to discover errors or fraud that are either material or immaterial.
c. Plan to discover errors or fraud that are material.
d. Plan to consider factors affecting the risk of material misstatement both at the
financial statement and the account balance level.

142. In a financial statement audit, audit risk represents the probability that
a. Internal control fails and the failure is not
detected by the auditor's procedures.
b. The auditor unknowingly fails to modify an opinion on materially misstated
financial statements.
c. Inherent and control risk cause errors that could be material to the financial
statements.
d. The auditor is not retained to conduct a financial statement audit in the
succeeding year.

143. In a financial statement audit, inherent risk represents the
a. Susceptibility of an account balance to error that could be material.
b. Risk that error could occur and not be prevented
c. Risk that error could occur and not be detected by the auditor's procedures.
d. Risk that the auditor fails to modify materially misstated financial statements.

144. What is the magnitude of audit risk if inherent risk is .50, control risk is .40, and
detection risk is .10?
a. .20. b. .10. c. .40. d. .04.

145. The concept of materiality would be least important to an auditor in determining
a. Transactions that should be reviewed.
b. The need for disclosing a particular transaction or
event.
c. The extent of audit work planned for particular
accounts.
d. The effects of an auditor's direct financial
interest in a client.

146. When must an auditor perform analytical review procedures in a financial statement audit?
a. Testing controls over financial cycles.
b. Performing tests to substantiate balances.
c. Planning the nature, timing and extent of procedures.
d. Performing tests to substantiate transactions.

147. The audit of financial statements includes the initial approach of addressing fraud. How
must an auditor address fraud during the planning stage?
a. The auditor must test for fraud in the planning stage by sampling accounts.
b. The auditor must believe in the competency and honesty of employees.
c. The auditor must determine the types of material fraudulent transactions that may occur.
d. The auditor will provide an audit opinion to the client regarding fraud in the planning
phase.

148. How will the results of the auditor's assessment of fraud risk factors further affect the
planned audit procedures?
a. Management will need to provide a report on fraudulent activities to both the

PCAOB and the audit firm.
b. The audit firm may assign partner and manager level personnel to certain fraud risk
related areas of the audit.
c. By the assignment of the client's accounting personnel to perform certain of the audit
functions so that the auditors can focus on fraud.
d. Law enforcement individuals will need to be hired as specialists to assess the legal
and criminal ramifications of any fraud discovered.

149. Which of the following helps prevent misunderstandings during audit planning?
a. Auditor involvement in the preparation of the client's financial records.
b. Client involvement in determining specific audit planning issues.
c. A preliminary planning conference with the client to discuss fees, timing, client
assistance, and related issues.
d.Involvement of the client's internal auditors in setting materiality levels and
determining the scope of audit tests.

150. The auditor's understanding with a client as to the scope and nature of services to be
provided is usually documented in:
a. the preliminary planning memorandum.
b. the engagement letter.
c. communications with the audit committee.
d. the audit report.

151. The primary reason an engagement letter is obtained by audit firms prior to starting
the work is that:
a. it clarifies the responsibilities of management and those of the auditor.
b. it defines the firms policies and procedures regarding new clients.
c. it provides an insurance policy for companies entering into the agreement.
d. it communicates the type of opinion that will be rendered on the engagement.

152. The reason an independent auditor gathers evidence is to
a. Form an opinion on the financial statements.
b. Detect fraud.
c. Evaluate management.
d. Evaluate internal controls.

153. Detection risk differs from both control risk and inherent risk in that detection risk
a. Exists independently of the financial statement audit.
b. Can be changed at the auditor's discretion.
c. Arises from risk factors relating to fraud.
d. Should be assessed in nonquantitative terms.

154. Which of the following is an inherent limitation of internal controls?
a. Judgmental sampling.
b. Collusion.
c. Segregation of duties.
d. Employee peer review
(Inherent limitations of internal control include collusion, human error, and management override

Fraud vs. Error
Classify each of the following as either fraud or error. Write F for fraud and E for error.
F 155. Alteration, falsification or manipulation of accounting records or documents
F 156. Collusion
E 157. Inadvertent misapplication of accounting policies
F 158. Embezzlement of funds
E 159. Mathematical or clerical mistakes in underlying records and accounting data
F 160. Intentionally applying accounting policies inappropriately
F 161. Recording transaction without economic substance
E 162 Oversight or misinterpretation of facts
F 163. Misappropriation of assets
F 164. Suppression or omission of effects of transactions from records or documents


165. Inherent risk and control risk differ from detection risk in that they
a.. Arise from the misapplication of auditing procedures.
b.. May be assessed in either quantitative or nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditors discretion.

166. The auditor is most likely to presume that a high risk of defalcation exists if
a. The client is a multinational company that does business in numerous foreign
countries.
b. The client does business with several related parties.
c. Inadequate segregation of duties places an employee in a position to perpetrate and
conceal thefts.
d. Inadequate employee training results in lengthy CBIS exception reports each month.

167. In considering materiality for planning purposes, an auditor believes that misstatements
aggregating $10,000 would have a material effect on an entitys income statement, but that
misstatements would have to aggregate $20,000 to materially affect the balance sheet.
Ordinarily, it would be appropriate to design auditing procedures that would be expected to
detect misstatements that aggregate
a. $10,000
b. $15,000
c. $20,000
d. $30,000

168. Which of the following is an example of fraudulent financial reporting?
a. Company management changes inventory count tags and overstates ending inventory,
while understating cost of goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions by
debiting an expense account, thus overstating expenses.
c. An employee steals inventory and the shrinkage is recorded in cost of goods sold.
d An employee steals small tools from the company and neglects to return them; the cost
is reported as a miscellaneous operating expense.

169. Which of the following best describes what is meant by the term fraud risk factor?
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presence often have been observed in circumstances where frauds have
occurred.
c. Factors whose presence requires modification of planned audit procedures.
d. Reportable conditions identified during an audit.

170. Which of the following is correct concerning requirements about auditor communications
about fraud?
a. Fraud that involves senior management should be reported directly to the audit committee
regardless of the amount involved.
c. Fraud with a material effect on the financial statements should be reported directly by the
auditor to the Securities and Exchange Commission.
c Fraud with a material effect on the financial statements should ordinarily be disclosed by
the auditor through use of an emphasis of a matter paragraph added to the audit report.
d. The auditor has no responsibility to disclose fraud outside the entity under any
circumstances.



171. The most difficult type of misstatement to detect is fraud based on
a. The overrecording of transactions.
b.. The nonrecording of transactions.
c.. Recorded transactions in subsidiaries.
d.. Related-party receivables.

172. An auditor who discovers that a clients employees paid small bribes to municipal
officials most likely would withdraw from the engagement if
a. The payments violated the clients policies regarding the prevention of illegal acts.

b. The client receives financial assistance from a federal government agency.
c. Documentation that is necessary to prove that the bribes were paid does not exist.
d. Management fails to take the appropriate remedial action.

173. The fraud triangle describes conditions present in fraud and includes:
a . embezzlement or misappropriation.
b. theft.
c. fraudulent financial reporting.
d. incentives or pressures to commit fraud.

174. Charlie Company issues a financial press release stating that revenues will climb 20%
higher in early first quarter 2009. By the end of first quarter 2009, it becomes apparent that
Charlie will miss its targeted revenues. What is the possible fraud motivation in this case?
a. Pressures
b. Opportunity
c. Rationalization
d. Skepticism

Problem : Other Auditors and Planning

Dodd, CPA, audited Adams Companys financial statements for the year ended December 31,
2002. On November 1, 2003, Adams notified Dodd that it was changing auditors and that Dodds
services were being terminated. On November 5, 2003, Adams invited Hall, CPA, to make a
proposal for an engagement to audit its financial statements for the year ended December 31,
2003.
Required:
a. What procedures concerning Dodd should Hall perform before accepting the engagement?
b. What additional procedures should Hall consider performing during the planning phase of this
audit (after acceptance of the engagement) that would not be performed during the audit of a
continuing client?