At - Prelim Rev (875 MCQS) Red Sirug of

AUDITING THEORY c.
Except in examinations of interim

PRELIM REVIEWER financial statements.
(875 Multiple Choice Questions) d. Except in circumstances where the CPA is
associated with unaudited financial
statements.
SET 1
6. It refers to the attribute or quality of audit
1. Which of the following engagements is evidence.
covered by the Framework for Assurance a. Sufficiency
Engagements? b. Relevance
a. Consulting engagements c. Reliability
b. Preparation of tax returns d. Appropriateness
c. Independent financial statements
audit 7. Which of the following best describes due
d. Agreed-upon procedures care?
a. Reasonable infallibility
2. Independent auditing can best be described b. Tact in avoiding legal liability
as a c. Requisite skill and diligence
a. Subset or branch of accounting. d. Freedom from undue influence
b. Professional activity that measures and
communicates financial accounting data. 8. Users of financial statements demand
c. A discipline or professional activity independent audit because
that attests to the fair presentation a. Users demand assurance that fraud does
of financial statements. not exist.
d. Regulatory activity that prevents the b. Management may not be objective in
issuance of improper financial reporting.
information. c. Users expect auditors to correct
management errors.
3. An auditor should not render a report on: d. Management relies on the auditor to
a. Client internal control. improve internal control.
b. Management performance.
c. The achievability of forecasts. 9. An audit of financial statements is
d. Quarterly financial information. conducted to determine if the
a. Organization is operating efficiently and
4. The assumption underlying an audit of effectively
financial statements is that they will be b. Client's internal control is functioning as
used by intended.
a. Different groups for different c. Auditee is following specific procedures
purposes. or rules set down by some higher
b. The general public in making investment authority
decisions. d. Overall financial statements are
c. The board of directors as basis of stated in accordance with an
declaring cash dividends. identified financial reporting
d. The regulatory agencies to verify framework.
information that is relevant to their
supervisory functions. 10. An audit designed to determine the extent to
which the desired results of an activity
5. On every audit engagement, the CPA should established by the legislative or other
comply with applicable PSAs authorizing body are being achieved.
a. Without exception. a. Economy audit
b. Except in examinations that result in a b. Efficiency audit
qualified report. c. Program results audit
d. Financial-related audit
AT – Prelim Rev (875 MCQs) Red Sirug

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11. Which of the following methods is most 16. To raise the standards of the profession, the
commonly used to reduce information risk? Philippine Accountancy Act of 2004 requires
a. Allow users to verify information. that the CPA profession be integrated under
b. Allow all users to prepare the statements. the rules to be established by
c. Users share information risk with a. The PICPA.
management. b. The Board of Accountancy.
d. Have the financial statements c. The Professional Regulation
audited. Commission.
d. The Government Association of CPAs.
12. Which of the following best describes the
primary purpose of audit procedures? 17. Management assertions are
a. To detect errors or fraud a. Stated in the footnotes to the financial
b. To comply with generally accounting statements.
principles b. Provided to the auditor in the assertions
c. To gather sufficient, appropriate letter, but are not disclosed in the
evidence financial statements of the entity.
d. To verify the accuracy of account c. Implied or express representations
balances about the accounts in the financial
statements.
13. It is essential that users regard CPA firms as: d. Explicitly expressed representations
a. Competent. about the financial statements.
b. Unbiased.
c. Technically proficient. 18. In performing a financial statement audit,
d. All of the above which of the following would an auditor
least likely consider?
14. Which of the following is least likely an a. Internal control.
application of maintaining an attitude of b. Compliance with GAAP.
professional skepticism? c. Fairness of the financial statement
a. The auditor is alert to audit evidence that amounts.
contradicts or brings into question the d. Quality of management’s business
reliability of documents or management decisions.
representations.
b. In planning and performing an audit, 19. When the CPA is not independent, the CPA is
the auditor assumes that precluded from issuing a
management is dishonest. a. Review report.
c. The auditor makes a critical assessment, b. Compilation report.
with a questioning mind, of the validity of c. Tax planning report.
audit evidence obtained. d. Management advisory report.
d. The auditor does not consider
representations from management as 20. The risk that the auditor will fail to uncover a
substitute for obtaining sufficient material misstatement is eliminated
appropriate audit evidence to be able to a. If client has effective internal control.
draw reasonable conclusions on which to b. If client follows PFRS.
base the audit opinion. c. When the auditor has complied with PSA.
d. Under no circumstances.
15. Which of the following is not one of the
concepts in the framework of auditing 21. No matter how competent a CPA may be, his
theory? opinion on financial statements will be of
a. Evidence little value to those who rely on him unless
b. Ethical conduct he
c. Fair presentation a. Issues an unqualified opinion
d. Conflict of interest b. Maintains his independence.
c. Maintains a program of continuing
education
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d. Serves his clients with professional
concern of their best interests. 28. An audit committee must be comprised of
outside directors. Which of the following is
22. An audit can have a significant effect on considered an outside director?
a. Business risk. a. A consultant to the company.
b. Information risk. b. A member of company management.
c. The risk-free interest rate. c. The company's independent auditor.
d. All of these. d. A retired executive from another
company.
23. In government auditing, the three elements
of expanded scope auditing are 29. "The auditor would ordinarily expect to find
a. Goal analysis, audits of operations, audit evidence to support management
of systems. representations and not assume that they
b. Financial and compliance, economy are necessarily correct". This is an example
and efficiency, program results. of:
c. Pre-audit, post-audit, internal audit. a. Due diligence.
d. National government audit, local b. Unprofessional behavior.
government audit, corporation audit. c. An attitude of professional
skepticism.
24. Which of the following types of audits are d. A rule in the code of Professional
most similar? Conduct.
a. Operational audits and compliance audit.
b. Internal audits and independent financial 30. The audit process is
statement audits. a. Regulated by the PICPA
c. Independent financial statement audits b. Performed only by CPAs
and operational audits. c. The only service a CPA is allowed to
d. Compliance audits and independent perform by law
financial statement audits. d. A special application of the
scientific method of inquiry
25. If it is probable that the judgment of a
reasonable person would have been 31. In determining the scope and nature of
changed or influenced by the omission or services to be performed in public practice,
misstatement of information, then the a CPA firm should
information is a. Have in place internal control procedures
a. Relevant. b. Only perform accounting related services
b. Pervasive. c. Require independence for all services
c. Material. performed
d. Significant. d. Determine that the performance of
all services is consistent with the
26. Which of the following is not among the firm's members' role as
factors that result to limitations of audit? professionals.
a. Use of testing
b. Human error 32. Which of the following is not an assurance
c. Going concern problem of the that the auditors give to the parties who rely
assurance client on the financial statements?
d. Evidence is basically persuasive rather a. Auditors give assurance that the
than conclusive financial statements are accurate.
b. Auditors know how the amounts and
27. Which of the following services is not within disclosures in the financial statements
the area of public accounting? were produced.
a. Attest function c. Auditors gathered enough evidence to
b. Taxation service provide a reasonable basis for forming an
c. Write-up work for one client opinion.
d. Management advisory services d. If the evidence allows the auditors to do
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so, auditors give assurance in the form of 38. Which of the following is the authoritative
opinion, as to whether the financial body designated to promulgate auditing
statements taken as a whole are fairly standards?
presented in conformity with GAAP. a. BOA
b. PICPA
33. Auditing standards differ from auditing c. FRSC
procedures in that procedures relate to d. AASC
a. Audit judgments.
b. Audit principles. 39. Which of the following statements is true?
c. Acts to be performed. a. An independent auditor must be a
d. Measures of performance. CPA.
b. Compliance audits are conducted to
34. Choose one of the following which would determine adherence to rules and
describe best the phrase "generally regulations set by the auditor.
accepted auditing standards": c. An audit, if properly conducted, ensures
a. They identify the policies and procedures that fraud is prevented.
for the conduct of the audit. d. After conducting an audit and release of
b. They define the nature and extent of the the auditor’s report, the primary
auditor's responsibilities. responsibility on the fairness of the
c. They provide guidance to the auditor financial statements is shifted to the
with respect to planning the audit and auditor.
writing the audit report.
d. They set forth a measure a measure 40. The Philippine Standards on Assurance
of the quality of the performance of Engagements (PSAEs) are to be applied in
audit procedures. a. The audit or review of historical financial
information.
35. Auditing includes both a(an) b. Assurance engagements dealing with
a. Evaluation process and a reporting historical financial information.
process. c. Compilation engagements and
b. Investigative process and a agreements to apply agreed-upon
reporting process. procedures to information.
c. Documentation process and an d. Assurance engagements dealing
evaluation process. with subject matters other than
d. Documentation process and a reporting historical financial information.
process.
41. The Philippine Standards on Quality Control
36. The audit committee of the board of (PSQCs) are to be applied to
directors of a company is responsible for a. Assurance engagements only.
a. Hiring the auditor b. Review engagements only.
b. The audit workpapers c. Compilation and review engagements
c. Preparing the financial statements only.
d. Independence and obtaining evidence d. All services that fall under the
AASC's engagement standards.
37. Which of the following types of audits would
be intended to determine whether a 42. These statements are issued by the AASC to
governmental entity is following sound provide interpretive guidance and practical
procurement practices? assistance to auditors in the implementation
a. Program audit of PSAs and to promote good practice.
b. Operational audit a. PREPSs
c. Compliance audit b. PAEPs
d. Financial statement audit c. PAPSs
d. PRSPSs
43. For the purpose of expressing negative

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assurance in the review report, the in order for them to be in conformity with
practitioner should obtain sufficient GAAP" is known as:
appropriate evidence primarily through a. Positive assurance.
a. Inquiry and confirmation b. Reasonable assurance.
b. Confirmation and tests of controls c. Negative assurance.
c. Inquiry and analytical procedures d. Negligent performance.
d. Analytical procedures and substantive
tests of details of transactions and 50. An independent audit aids in the
account balances communication of economic data because
the audit
44. The BOA vice-chairman shall be a. Lends credibility to the financial
a. Appointed by the PRC statements.
b. Elected by BOA members b. Confirms the accuracy of management's
c. Appointed by the President of the financial representation.
Philippines c. Guarantees that financial data are fairly
d. Appointed by the PRC upon presented.
recommendation by the PICPA d. Assures the readers of financial
statements that any fraudulent activity
45. The term of BOA vice-chairman is has been corrected.
a. One year.
b. Three years subject to renewal. 51. The purpose of an audit of financial
c. At the discretion of BOA members. statements is to
d. Same with the term of BOA chairman. a. Obtain an absolute level of assurance
that the financial statements as a whole
46. An audit designed to evaluate the efficiency are free from material misstatement.
and effectiveness of an organization or some b. Relieve management or those charged
or part thereof would not come under the with governance of the responsibility for
title of the preparation and presentation of the
a. Performance audit. financial statements in accordance with
b. Compliance audit. the applicable financial reporting
c. Management audit. framework.
c. Enhance the degree of confidence of
d. Operational audit.
intended users in the financial
statements.
47.In financial statement audits, the audit d. Assure the future viability of the entity
should be conducted in accordance with by expressing an opinion on the entity's
a. PAS / PFRS financial statements.
b. Generally accepted auditing standards
c. Philippine Standards on Auditing 52. Inherent limitations in an audit stem from
d. Code of Ethics for CPAs in the Philippines the following factors except
a. Use of testing.
48. Which of the following statements does not
b. Incompetence of the auditor.
properly describe an element of the
theoretical framework of auditing? c. Internal control limitation.
a. Remoteness of users. d. Most audit evidence is persuasive rather
b. An audit benefits the public. than conclusive.
c. The data to be audited are verifiable.
d. Auditor should maintain independence 53. Auditing services may include which of the
with respect to the audit client. following?
a. Attesting to financial statements
49. The statement that the reviewer "is not b. Evaluation of a division’s performance
aware of any material modification that for management
should be made to the financial statements c. Examination of the economy and
efficiency of governmental operations
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d. All of the above which management has conducted
the affairs of the entity.
54. The review of unaudited financial statements d. The procedures required to conduct an
consists of: audit in accordance with PSAs should
a. Inquiry of management and be determined by the client who
analytical procedures. engaged the services of the auditor.
b. Inquiry of management and
documentation of internal controls. 58.The reason an independent auditor gathers
c. Analytical procedures and compliance evidence is to
with laws and regulations. a. Detect fraud
d. Internal control evaluation and b. Evaluate management
management representation. c. Evaluate internal controls
d. Form an opinion on the financial
55. The Philippine Standards on Auditing issued statements
by AASC:
a. Apply to independent examination 59.The auditor communicates the results of
of financial statements of any entity his or her work through the medium of the
when such an examination is a. Engagement letter.
conducted for the purpose of b. Audit report.
expressing an opinion. c. Management letter.
b. Need to be applied on all audit related. d. Audited financial statements.
c. Must not apply to other related activities
of auditors. 60. The expertise that distinguishes auditors
d. Require that in no circumstances would from accountants is in the
an auditor may judge it necessary to a. Ability to interpret PAS/PFRS.
depart from a PSA, even though such a b. Accumulation and interpretation of
departure may result to more effective evidence.
achievement of the objective of an audit. c. Ability to interpret generally accepted
accounting principles.
56.In the case of an audit of financial d. Requirement to possess education
statements, which of the following would beyond the bachelor's degree.
not be a valid criterion in ascertaining the
degree of correspondence between 61. The market for auditing services is driven by
assertions and established criteria? a. The regulatory authority of the Securities
a. International Accounting Standards and Exchange Commission.
b. Philippine Accounting Standards b. A demand by external users of
c. Philippine Standards on Auditing financial statements.
d. Philippine Financial Reporting Standards c. Pronouncements issued by the Auditing
and Assurance Standards Council.
57.Which of the following statements about d. Congress.
independent financial statement audit is
correct? 62. An independent audit is important to
a. The audit of financial statements readers of financial statements because it
relieves management of its a. Provides a measure of management's
responsibilities for die financial stewardship function
statements. b. Objectively examines and reports
b. An audit is designed to provide limited on management's financial
assurance that the financial statements statements
taken as a whole are free from material c. Reports on the accuracy of information
misstatement. in the financial statements
c. The auditor's opinion is not an d. Measures and communicates the
assurance as to the future viability financial data included in financial
of the entity as well as the statements
effectiveness and efficiency with
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63. Independent auditing can best be described a. Is not used in making decisions about
as materiality and audit risk.
a. A branch of accounting. b. Is necessary in the evaluation of
b. A regulatory function that prevents the management's judgments in
issuance of improper financial applying the entity's applicable
information. financial reporting framework.
c. A professional activity that measures c. Should be exercised in planning and
and communicates financial and business performing an audit of financial
data. statements but need not be docu-
d. A discipline which attests to the mented.
results of accounting and other d. Can be used as the justification for the
functional operations and data. decisions made by the auditor that are
not supported by the facts and
64. The primary purpose of an independent circumstances of the engagement.
financial statement audit is to
a. Provide a basis for assessing 68. The auditor's judgment concerning the
management's performance overall fairness of presentation of financial
b. Comply with government regulatory position, results of operation, and changes
requirements in cash flow is applied within the framework
c. Assure management that the financial of
statements are unbiased and free from a. Generally accepted auditing standards
material error which include the concept of materiality
d. Provide users with an unbiased b. Generally accepted accounting
opinion about the fairness of principles.
information reported in the financial c. Philippine Financial Reporting
statements Standards
d. Quality control
65.The criteria for evaluating quantitative
information vary. For example, in the case 69.One of the conditions that give rise to a
of an independent audit of financial demand for an external audit of financial
statements by CPA firms, the criteria are statements is expertise. Which of the
usually the: following best describes the meaning of
a. Philippine Standards on Auditing expertise as used in this context?
b. Philippine Financial Reporting a. Auditors usually rely on the work of
Standards an expert as a basis for evaluating
c. National Internal Revenue Code some assertions embodied in the
d. Securities and Exchange Commission financial statements.
Regulations b. Users usually lack the necessary
expertise to verify the reliability of
66. A profession is distinguished by certain the financial information.
characteristics including: c. As experts, auditors are expected to
a. Mastery of a particular intellectual skill, detect all material misstatements in the
acquired by training and education. financial statements.
b. Adherence by its members to a common d. The readers of the financial statements
code of values and conduct established must possess the necessary expertise
by its administrating body, including to be able to understand the financial
maintaining an outlook which is statements.
essentially objective.
c. Acceptance of a duty to society as a 70. Regulation of the accounting profession
whole. include:
d. All of these. a. Public Regulation as provided for in the
Philippine Accountancy Act of 2004.
67. Professional judgment: b. Regulation within the profession, through
the implementation of the Code of Ethics.
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c. Regulation within the firm, through the 77. A partner surviving the death or withdrawal
implementation of a system of quality of all the other partners in a partnership may
control. continue to practice under the partnership
d. All of these. name for a period of not more than ___ years
after becoming a sole proprietor.
71. This body is created to assist the BOA in the a. 1
attainment of the objective to continually b. 2
upgrade accounting education in the c. 3
Philippines, thus making Filipino CPAs d. 4
globally competitive.
a. PICPA CPE Council 78. The death, or disability of an individual CPA
b. Education Technical Council and/or the dissolution and liquidation of a
c. Accounting Teachers' Conference firm or partnership of CPAs shall be reported
d. Association of CPAs in Education to the BOA not later than ___ days from the
date of such death, dissolution or liquidation.
72. Which of the following is not a requirement a. 15
for a person applying for the CPA Board b. 30
Examinations? c. 60
a. Good moral character d. 90
b. Degree of BS Accountancy
c. Natural-born Filipino citizen 79. It refers to the inculcation, assimilation and
d. No conviction of any criminal offense acquisition of knowledge, skills, proficiency
involving moral turpitude. and ethical and moral values, after the
.initial registration of a professional that
73. Its function is to conduct a quality review on raise and enhance the professional's
applicants for registration to practice public technical skills and competence.
accountancy and render a report which shall a. Professional Development
be attached to the application for b. Continuing Professional Education
registration. c. Continuing Professional Development
a. Quality Review Board d. Professional Growth and Development
b. Quality Review Group
c. Board of Quality Reviewers 80. The following statements relate to CPE credit
d. Quality Review Committee units. Which is incorrect?
a. One credit hour of CPE program, activity
74. Which of the following is the accredited or source shall be equivalent to one (1)
national professional organization of CPAs? credit unit.
a. IFAC b. Any excess credit units in one year may
b. ASC be carried over to the succeeding years
c. AASB within the three-year period.
d. PICPA c. The total CPE credit units for registered
accounting professionals shall be sixty
75. The ETC shall be composed of (60) credit units for three (3) years,
a. 7 members. provided that a minimum of fifteen (15)
b. 8 members. credit units shall be earned in each year.
c. 15 members d. Excess credit units earned may be
d. 14 members carried over to the next three-year
period including credit units earned
76. Which of the following does not have for doctoral and master's degrees.
representations in the FRSC?
a. PICPA 81. The following statements relate to the
b. BIR exemption from CPE requirements. Which is
c. BOI false?
d. BOA a. A registered professional shall be
permanently exempted from CPE
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requirements upon reaching the age of c. Be fair and should not allow prejudice or
65 years old. bias, conflict of interest or influence of
b. A registered professional shall be others to override objectivity.
permanently exempted from CPE d. Act in a manner consistent with the
requirements upon reaching the age good reputation of the profession
of 60 years old. and refrain from any conduct which
c. A registered professional who is working might bring discredit to the
or practicing his/her profession abroad profession.
shall be temporarily exempted from
compliance with CPE requirements during 85. This fundamental principle requires a CPA
the period of his/her stay abroad not to use or disclose information acquired
provided that he/she has been out of during the course of performing professional
the country for at least two years services without proper and specific
immediately prior to the date of renewal. authority.
d. A registered professional who is a. Objectivity.
furthering his/her studies abroad shall be b. Professional Behavior.
temporarily exempted from compliance c. Professional Competence and Due care.
with CPE requirements during the period d. Confidentiality.
of his/her stay abroad provided that
he/she has been out of the country for at 86. Which of the following is not a ground for
least two years immediately prior to the suspension or removal of members of BOA?
date of renewal. a. Negligence in the performance of duties,
or lack of professional competence.
82. Which of the following statements b. Intolerance of violations of the
concerning a CPA's disclosure of confidential Philippine Accountancy Act.
client information is ordinarily correct? c. Final judgment of crimes involving moral
a. Disclosure should not be made even if turpitude.
such disclosure will protect the CPA's d. Rigging of the CPA licensure examination
professional interests in legal results.
proceedings.
b. Disclosure should be made only if there is 87. The Professional Regulatory Board of
a legal, or professional duty to make the Accountancy consists of:
disclosure. a. 1 Chairman and 4 members.
c. Disclosure may be made to any b. 1 Chairman and 5 members.
party on consent of the client. c. 1 Chairman and 6 members.
d. Disclosure may be made to any d. 1 Chairman and 7 members.
government agency without subpoena.
. 88. The Chairman and the members of the BOA
shall be appointed by the:
83. This refers to those persons who hold a valid a. Commissioner of the SEC.
certificate issued by the Board of b. President of the PICPA.
Accountancy. c. President of the Republic of the
a. Senior accounting practitioner. Philippines.
b. Professional accountant. d. Retiring chairman of the Board of
c. Professional accountant in public Accountancy.
practice.
d. Audit associate. 89. Members of the Professional Regulatory
Board of Accountancy shall serve for:
84. The principle of professional behavior a. Three years, subject to renewal.
requires a CPA to b. Seven years, not subject to renewal.
a. Be straightforward and honest in c. Three years, subject to
performing professional services. reappointment.
b. Perform professional services with due
care, competence and diligence.
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d. Three years, not subject to b. The President of the Republic of the
reappointment. Philippines.
c. The Professional Regulatory Board of
90. Which of the following is not mentioned as a Accountancy.
power of the Board? d. The Professional Regulation
a. To monitor the conditions affecting the Commission.
practice of accountancy.
b. To supervise the registration, licensure 95. A candidate successfully passes the Board
and practice of accountancy. exams if he/she obtains
c. To sentence to imprisonment CPAs a. A general average of sixty-five percent
who have been found guilty of (65%).
violations of the Accountancy Act. b. A general average of seventy-five
d. To issue, suspend, revoke, or reinstate percent (75%).
the Certificate of Registration for the c. A general average of seventy-five
practice of the accountancy profession. percent (75%) in at least a majority of
the subjects given in the Board exams.
91. Which of the following is the sectoral d. A general average of seventy-five
organization for CPAs in Public Practice? percent (75%), with no grades lower
a. ACPACI than sixty-five percent (65%) in any
b. ACPAPP given subject.
c. ACPAE
d. GACPA 96. In the event a candidate obtains the rating
of seventy-five percent (75%) and above in
92. This is the standard-setting body that at least a majority of subjects as provided
replaces the Accounting Standards Council for in RA9298, and one subject has a rating
(ASC) and is tasked to develop and issue of 64%, he shall be considered as:
standards which will represent generally a. A failed candidate.
accepted accounting principles in the b. A conditioned candidate.
Philippines: c. A successful passer of the CPA Board
a. Accounting Standards Board. exams.
b. Financial Reporting Standards d. Cannot be determined without additional
Committee. information
c. Financial Reporting Standards
Council. 97. A certificate under seal, bearing a
d. Auditing and Assurance Standards registration number, issued to an individual,
Council. by the PRC, upon recommendation by the
BOA, signifying that the individual has
93. This standard-setting body replaces the complied with all the legal and procedural
Auditing Standards and Practices Council requirements for such issuance:
(ASPC) and is tasked to develop and issue a. Certificate of accreditation
Philippine Standards on Auditing and related b. Certificate of registration
Interpretations: c. Certificate of quality review
a. Accounting Standards Board. d. Certificate of identification
b. Financial Reporting Standards
Committee. 98. This bears the registration number, date of
c. Financial Reporting Standards Council. issuance with an expiry date, due for
d. Auditing and Assurance Standards periodic renewal, duly signed by the
Council. Chairperson of the PRC and issued by the
PRC to a registered CPA upon payment of the
94. The Chairpersons of the FRSC and the AASC registration fees:
shall be appointed by: a. Certificate of registration
a. The Philippine Institute of Certified Public b. Certificate of accreditation
Accountants. c. Professional identification card
d. Professional tax receipt
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4. Internal auditing relates to an
99. A professional identification card has a a. Audit which is performed by a
validity of: practitioner as an independent
a. Six years contractor.
b. Five years b. Audit which is incidentally
c. Four years concerned with the detection and
d. Three years prevention of fraud.
c. Audit which serves the
100. Foreign CPAs needs of management
a. Are allowed to practice accountancy in d. Audit wherein the auditor
the Philippines without restriction. should be independent of management
b. Are never allowed to practice both in fact and in mental attitude
accountancy in the Philippines.
c. May be allowed to practice accountancy 5. Independent auditors cannot be totally
in the Philippines, but only in areas independent
outside public practice. a. Because they don’t audit financial
d. May be allowed to practice statements
accountancy in the Philippines, b. Since they do not possess the CPA
subject to the rules and regulations license
on reciprocity. c. As long as employer-employee
relationship exists
SET 2 d. Unless their immediate supervisor is a
CPA
1. These are independent professional services
that improve the quality of information for 6. The Philippine Standards on Auditing issued
decision-making. by the Auditing and Assurance Standards
a. Audit services Council (AASC)
b. Assurance services a. Must be followed in all situations.
c. Attestation services b. Are interpretations of generally
d. Management consultancy accepted auditing standards
c. Are optional guidelines which an auditor
2. Which of the following types of audits is may choose to follow or not follow when
performed most frequently by CPAs on a conducting an audit.
fee basis and for more than one client? d. Are the equivalent of laws for audit
a. Government audits practitioners.
b. Compliance audits
c. Internal audits 7. The auditor's best defense when material
d. Financial statement misstatements in the financial statements
audits are not uncovered in the audit is that
a. The financial statements are client's
3. The independent auditor lends credibility responsibility.
to client financial statements by b. The audit was conducted in
a. Stating in the auditor’s management accordance with PSAs
letter that the examination was made c. Client is guilty of contributory
in accordance with PSAs negligence.
b. Attaching an auditor’s opinion to d. The audit was conducted in accordance
the client’s financial statements. with generally accepted accounting
c. Testifying under oath about client principles.
financial statements.
d. Maintaining clear-cut distinctions 8. The auditor considers materiality from:
between management representations a. AASC perspective
and auditor’s representations. b. Client perspective
c. Independence perspective
d. Reasonable user perspective
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c. Evaluation of a capital investment
9. Which of the following is more difficult to proposal.
evaluate objectively? d. Performance of an entity that could
a. Compliance with government indicate efficiency and effectiveness.
regulations
b. Efficiency and effectiveness of 15. In performing an assurance engagement, a
operations professional accountant typically
c. All of the above are equally difficult a. Provides management consulting advice.
d. Presentation of financial statements in b. Supplies litigation support services.
accordance with the PFRS c. Assesses control risk at a low level.
d. Expresses a conclusion about an
10.The practitioner makes a critical assertion.
assessment of validity of audit evidence,
with a questioning mind and being alert to 16. Which of the following is not an assurance
conditions which may indicate possible engagement?
misstatement due to error or fraud. a. Risk Assessment Service
a. Objectivity and integrity b. Information System Reliability Service
b. Professional skepticism c. Business Performance Measurement
c. Independence is mental attitude d. Management Consulting Service
d. Sufficient appropriate evidence
17. The three commonly-sought types of
11.In the auditing environment, failure to assurance services are
meet the PSAs is often a. Audits, reviews, and compilations.
a. An accepted practice. b. Audits, reviews, and other
b. A suggestion of negligence. assurance services.
c. Conclusive evidence of negligence. c. Audits, compilations, and other
d. Tantamount to criminal behavior. assurance services.
d. Reviews, compilations, and other
12.The following phrases relate to the assurance services.
definition of auditing. Which one is
incorrect? 18. Which of the following statements is true?
a. Systematic process a. Assurance engagements do not require
b. Objectively obtaining and obtaining independence.
evidence b. The term “auditor” is broader in scope
c. Assertions about economic actions compared to the term “practitioner.”
and events c. Assurance engagements performed
d. Degree of correspondence by professional accountants are
between assertions and GAAS intended to enhance the credibility
of information.
13. Non-assurance engagements include all of d. The degree or level of assurance that
the following except may be provided by the practitioner is
a. Compliance audit. inversely related to the scope of
b. Management consulting. procedures performed and their results.
c. Agreed-upon procedures.
d. Preparation of tax returns where no 19. Which of the following forms may be the
conclusion is expressed. subject matter of assurance engagements?
a. Behavior
14. The subject matter of an assurance b. Historical financial information
engagement can take the following forms c. Systems and processes
except d. All of the above
a. The entity’s internal control.
b. Historical or prospective financial 20. Engagement risk is influenced by the risks
statements. associated with the following except
a. Nature and form of the subject matter.
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b. Nature and form of the criteria applied to 26. Which of the following methods is most
the subject matter. commonly used to reduce information risk?
c. Unreasonably low professional fee. a. Allow all users to prepare the statements.
d. Nature and extent of the process used to b. Allow users to verify information.
collect and evaluate evidence. c. Have the financial statements
audited.
21. Absolute assurance is not attainable as a d. Users share information risk with
result of such factors as: management.
a. The use of judgment.
b. The use of selective testing. 27. The phrase in our opinion in the auditor’s
c. The inherent limitations of control report is intended to inform users that
systems. auditors
d. All of the above a. Guarantee fair presentation of the
financial statements.
22. If the auditor learns that an entity is b. Act as insurers of the accuracy of the
inappropriately using the auditor’s name in financial statements.
association with financial information, he/she c. Certify the material presented in the
should: statements by management.
a. Remain silent. d. Based their conclusions about the
b. Seek legal advice if necessary. statements on professional
c. Require management to cease doing judgment.
so.
d. Inform any known third party users of the 28. The need for assurance services arises
inappropriate use of his/her name in because:
connection with the information. a. There is a potential bias in providing
information.
23. A CPA should not submit unaudited financial b. Economic transactions are less complex
statements of a non-public entity to a client than they were a decade ago.
or others unless, as a minimum, the CPA c. There is a consonance of interests of the
complies with the provisions applicable to preparer and the user of the financial
a. Audit engagements. statements.
b. Review engagements. d. Most users today have access to the
c. Assurance engagements. system that generates the financial
d. Compilation engagements. statements they use.
24. You own Dude, Inc., which manufactures 29. This tax service includes the determination
wooden tables. You need to hire some of the tax consequences of planned or
accountants to prepare your monthly potential transactions, followed by making
financial statements. The preparation of suggestions on the most desirable course of
your financial statements is referred to as action such as to legally minimize the tax
a(n) liability while achieving the client’s
a. Audit. objectives.
b. Review. a. Tax shelter
c. Compilation. b. Tax evasion
d. Special report. c. Tax planning
d. Tax compliance
25. Distribution of a report is always restricted
when 30. Which of the following characteristics is not
a. Negative assurance is given. considered necessary in determining
b. A review has been performed. whether the criteria are suitable?
c. There is a positive expression of opinion. a. Reliability
d. Agreed-upon procedures have been b. Relevance
performed. c. Neutrality
d. Sufficiency
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opinion thereon, the auditor acts
31. In an assurance engagement, this refers to exclusively in the capacity of an auditor.
the information obtained by the practitioner d. In collecting evidence, auditors
in arriving at the conclusions on which the should maintain an attitude of trust
conclusion is based. about their clients' assertions.
a. Criteria
b. Assertions 37. The market for auditing services is driven by
c. Evidence a. Congress at the state level
d. Generally accepted auditing standards b. A demand by external users of
financial statements
32. Compilation is an example of which one of c. The regulatory authority of the Securities
the following types of services? and Exchange Commission
a. Auditing d. Pronouncements issued by the Auditing
b. Review Standards and Practices Council
c. Consulting
d. Accounting 38. Which of the following statements reflects
an auditor's responsibility for detecting fraud
33. The Framework of Philippine Standards on and error?
Auditing distinguishes audits from related a. An auditor is responsible for detecting
services. Related services include all of the employee errors and simple fraud, but
following, except not for discovering fraud involving
a. Reviews. employee collusion or management
b. Compilations. override.
c. Agreed-upon procedures. b. An auditor should design the audit
d. Management consulting. to provide reasonable assurance of
detecting errors and fraud that are
34. Assurance services involve which of the material to the financial statements.
following? c. An auditor should plan the audit to detect
a. Relevance as well as reliability. errors and fraud that are caused by
b. Nonfinancial information as well as departures from the applicable FRF.
traditional financial statements. d. An auditor is not responsible for
c. Electronic databases as well as printed detecting errors and fraud unless the
reports. application of PSAs and PAPs would result
d. All of the above. in such detection.
35. Which of the following is not one of the 39. The adequacy of disclosures in the financial
penalties that can be imposed by the BOA? statements and footnotes is the primary
a. Reprimand responsibility of the:
b. Fine or imprisonment a. Client
c. Revocation of CPA certificate b. Auditor in charge of field work
d. Suspension of CPA certificate c. Partner assigned to engagement
d. Staff member who drafted the
36. Which of the following is an incorrect statements
statement relating to the theoretical
framework of auditing? 40. Generally accepted auditing standards do
a. Effective internal control structure not require auditors of financial statements
reduces the probability of fraud or to
irregularities in an organization. a. Assess the risk of occurrence of errors
b. Application of generally accepted and fraud
accounting principles results in a fair b. Design audits to provide reasonable
presentation of financial statements. assurance of detecting errors and frauds
c. When examining financial data for the c. Report all the findings of errors and
purpose of expressing an independent fraud to police authorities

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d. Understand the nature or errors and a. Must be a natural-born citizen and
fraud resident of the Philippines.
b. Must not be a director or officer of the
41. The risk that the auditor's own work will lead APO at the time of his/her appointment.
to the decision that material misstatements c. Must be of good moral character and
do not exist in the financial statements, must not have been convicted of crimes
when in fact such misstatements do exist, is involving moral turpitude.
a. Control risk d. Must be a duly registered CPA with
b. Detection risk more than ten (10) years of work
c. Inherent risk experience in any scope of practice
d. Audit risk of accountancy.
42. With respect to the concept of materiality, 46. Which statement is incorrect regarding the
which one of the following statements is term of office of the chairman and the
correct? members of the Board of Accountancy
a. Materiality is a matter of (BOA)?
professional judgment. a. The Chairman and members of the Board
b. Materiality is determined by reference to shall hold office for a term of three years.
AASC's guidelines. b. A person may serve the BOA for not more
c. Materiality depends on the nature of a than twelve years.
transaction rather than the peso amount c. A member of the BOA may
of the transaction. continuously serve office for more
d. Materiality depends only on the peso than nine years.
amount of an item relative to other items d. No person who has served two (2)
in the financial statements. successive complete terms shall be
eligible for reappointment until the lapse
43. The following statements relate to the Board of one (1) year.
of Accountancy. Which statement is correct?
a. The Board consists of a Chairman 47. The BOA shall submit to the PRC the ratings
and six members. obtained by each candidate within how
b. The chairman and members are many calendar days after the examination?
appointed by the President of the a. 5 days
Philippines upon recommendation of b. 10 days
PICPA. c. 15 days
c. Majority of the board members shall as d. 30 days
much as possible be in public practice.
d. The Professional Regulation Commission 48. Which of the following is not one of the
may remove from the Board any member grounds for proceedings against a CPA?
whose certificate to practice has been a. Insanity.
removed or suspended. b. Immoral or dishonorable conduct.
c. Gross negligence or incompetence in the
44. The APO shall submit its nominations with practice of his profession.
complete documentation to the Commission d. Engaging in public practice while
not later than ______ prior to the expiry of being employed in a private
the term of an incumbent chairman or enterprise.
member.
a. 30 days 49. The primary duty to enforce the provisions of
b. 60 days RA 9298 and its IRR rests with
c. 90 days a. The PRC
d. 120 days b. The BOA
c. The AASC
45. A member of the BOA shall, at the time of d. The PRC and BOA
his/her appointment, possess the following
qualifications, except
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50. The PICPA shall renew its Certificate of the circumstances to achieve the objective
Accreditation once every how many years of the audit.
after the date of the Resolution granting the b. The auditor's opinion enhances the
petition for re-accreditation and the issuance credibility of the financial statements.
of the said certificate upon submission of the c. The phrase used to express the
requirements? auditor's opinion is "present fairly, in all
a. 2 years material respects".
b. 3 years d. The risk that the auditor will fail to
c. 4 years uncover material misstatement is
d. 6 years eliminated when the auditor
conducts the audit in accordance
51. The practice of accountancy includes the with PSAs.
following except:
a. Serving as audit examiner for the 55.For what reason does an independent
Commission on Audit. auditor gather evidence?
b. Working as a Dean of a College that a. To assess management
grants a degree of BS Accountancy. performance
c. Being appointed as the marketing b. To detect fraud
manager of a business enterprise. c. To detect misstatements
d. Provision of assurance services to more d. To form an opinion on the
than one client and on a fee basis. financial statements
52. Which of the following is one of the functions 56.In conducting an appraisal of the economy
of Quality Review Committee: and efficiency with which company
a. To promulgate accounting and auditing resources are used, an internal auditor's
standards that will be generally accepted responsibility is to:
in the Philippines. a. Verify the accuracy of asset valuation.
b. To conduct a review on applicants b. Verify the existence of assets.
for registration to practice public c. Determine whether operating
accountancy and render a report standards have been established.
which shall be attached to the d. Review the reliability of operating
application for registration. information.
c. To adopt a Code of Ethics for the practice
of accountancy. 57. Because an external auditor is paid a fee by
d. To evaluate periodically the performance a client company, he
of educational institutions offering a. Is absolutely independent and may
accountancy education. conduct an audit.
b. May be sufficiently independent to
53.No matter competent a CPA may be, his conduct an audit.
opinion on financial statements will be of c. Is never considered to be independent.
little value to those who rely upon him d. Must receive approval of the Securities
unless he: and Exchange Commission before
a. Maintains his independence. conducting an audit.
b. Maintains professional competence.
c. Maintains a program of continuing 58. Which of the following is a conceptual
education. difference between the attestation standards
d. Serves his clients with professional and generally accepted auditing standards?
concern. a. The attestation standards do not permit
an attest engagement to be part of a
54.Which of the following statements about business acquisition study or a feasibility
independent financial statement audit is study.
incorrect? b. The attestation standards provide a
a. The term "scope of the audit" refers to framework for the attest function
audit procedures deemed necessary in beyond historical financial
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statements. b. That it provides a safeguard to keep
c. The requirement that the practitioner be unscrupulous people out.
independent in mental attitude is omitted c. The need for public confidence in
from the attestation standard. the quality of service of the
d. None of the standards of fieldwork in profession.
generally accepted auditing standards d. That it allows Professional Regulation
are included in the attestation standards. Commission to have a yardstick to
measure deficient performance.
59. The exercise of due professional care
requires that an auditor 63. If a firm, or a network firm, has a direct
a. Uses error-free judgment. financial interest in an audit client of the
b. Considers internal control, including tests firm, the self-interest threat created would
of controls. be so significant no safeguard could reduce
c. Be responsible for fulfilling his or the threat to an acceptable level. The
her duties diligently and carefully. action appropriate to permit the firm to
d. Examines all corroborating evidence perform the engagement would be to
available. a. Dispose of the financial interest.
b. Dispose of a sufficient amount of it so
60. The objectives of the Philippine that the remaining interest is no longer
accountancy Act of 2004 are the following material.
except: c. Either a or b
a. The standardization and regulation of d. Neither a nor b
accounting education.
b. The examination for registration of 64. Which of the following statements is
certified public accountants. incorrect?
c. The integration of the accounting a. CPAs lose their independence if they
profession. acquire any direct financial interest in a
d. The supervision, control, and regulation client.
of the practice of accountancy in the b. CPAs lose their independence if they
Philippines. acquire any indirect financial
interest in a client.
61. A CPA is in public accounting practice when c. CPAs lose their independence if they
he/she acquire a material indirect financial
a. Holds, or is appointed to, in an interest in a client.
accounting professional group in d. CPAs lose their independence if they
government or in a government-owned have a material direct financial interest in
and/or controlled corporation where a client.
decision making requires professional
knowledge in the science of accounting. 65. A violation of the ethical standards would
b. Represents his/her employer before most likely have occurred when a CPA
government agencies on tax and other a. Made arrangement with a bank to collect
matters related to accounting. notes issued by a client in payment of
c. Represents his/her clients before fees due.
government agencies on tax and b. Joined an accounting firm made up of
other matters related to accounting. three non-CPA practitioners.
d. Teaches accounting, auditing, c. Issued an unqualified opinion on the
management advisory services, 2010 financial statements when fees
accounting aspect of finance, business for the 2009 audit were unpaid.
law, taxation, and other technically d. Purchased a bookkeeping firm's practice
related subjects. of monthly write-ups for a percentage of
fees received over a three-year period.
62. The underlying reason for a code of
professional conduct for any profession is 66. The confidential relationship applies to
a. That it is required by Congress. a. All services provided by CPAs.
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b. Only audit and attestation services. worth.
c. Audit and tax services, but no MAS
services. 71.The Code of Ethics would be violated if a
d. Audit and MAS services, but not tax CPA accepted a fee for services and the
services. fee was:
a. Fixed by a public authority.
67.A CPA’s retention of records as a means of b. Based on a price quotation submitted
enforcing payment of an overdue audit fee in competitive bidding.
is an act that is: c. Based on the results of judicial
a. A violation of generally accepted proceedings in a tax matter.
auditing standards. d. Payable after a specified finding
b. Considered acceptable by the Code of was attained in a review of
Ethics. financial statements.
c. Ill advised since it would impair the
CPA’s independence with respect to the 72.The CPA shall not concurrently engage in
client. any business or occupation which impairs
d. Considered discreditable to the his objectivity in rendering professional
profession. services or which is inconsistent with his
practice or employment. This provision of
68.Which of the following acts of the CPA the code of ethics is applicable to:
would be most likely a violation of the a. Only to CPAs engaged in public
Code of Ethics? accountancy.
a. Assisting a client in preparing a b. CPAs engaged in public accountancy or
financial forecast. employed in a private enterprise.
b. Acting as auditor of a non-charitable c. CPAs engaged in public accountancy or
organization with audit client serving employed in a private enterprise or
as president. government agency.
c. Accepting a fee in a tax matter that is d. All CPAs engaged in public
contingent upon the result of an accountancy, or employed in a
administrative proceeding. private enterprise, a government
d. Having an immaterial loan to the agency or an educational
president of an audit. institution.
69.CPAs should not be liable to any party if 73. Ultimately, the decision as to whether the
they perform their services with: CPA is independent or not, will be made by
a. Ordinary negligence. the:
b. Regulatory providence. a. Audit Committee
c. Due professional care. b. Client
d. Good faith. c. Public
d. Auditor
70.Under the Code of Ethics, a CPA may not:
a. Perform bookkeeping services for an 74.In which of the following instances would
audit client. the independence of the CPA not be
b. Perform advisory services for an audit considered to be impaired? The CPA has
client. been retained as the auditor of a
c. Have any direct financial interest brokerage firm
in a client during the period a. Which owes the CPA audit fees for more
covered by the financial than one year.
statements. b. In which the CPA has a large active
d. Having any joint, closely held margin account.
investments with a principal c. In which the CPA’s brother is the
stockholder of an audit client during controller.
the period of audit engagement which d. Which owes the CPA audit fees for
is not material in relation to his net the current year services and just
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filed a petition for bankruptcy. characteristics distinguishing the
accountancy profession include the
75.A CPA, while performing an audit, strives following except:
to achieve independence in appearance in a. To meet public interest
order to: requirement.
a. Reduce risk and liability. b. Adherence by its members to a common
b. Become independent in fact. code of values and conduct established
c. Comply with GAAS. by its administering body.
d. Maintain public confidence in the c. Acceptance of a duty to society as a
profession. whole.
d. Mastery of a particular intellectual skill,
76.Contingent fees charged by CPAs engaged acquired by training and education.
in tax practice are permitted under the
rules of professional conduct because: 80.A practicing CPA is allowed by the CPA
a. This practice establishes fees which are Code of Ethics to do the following except:
commensurate with the value of the a. Announce the change in office location
services. in a newspaper.
b. Attorneys in tax practice customarily b. List his firm name in the building lobby
set contingent fees. directory in good taste and modest
c. Determination by taxing authorities are size.
a matter of judicial proceedings which c. Include his tax account number and
do not involve third parties. membership in PICPA on his stationary.
d. The consequences are based upon d. List his office telephones in the
findings of judicial proceedings or PLDT directory to box or bold type.
the findings of tax authorities.
81.Without the consent of the client, a CPA
77.Ethically, the auditor could: should not disclose confidential
a. Advertise only as to his expertise in information contained in working papers to
preparing income tax returns. a:
b. Base his audit fee on a percentage of a. Voluntary quality control review board.
the proceeds of his client’s stock issue. b. CPA firm that has purchased the
c. Perform an examination for a CPA’s accounting practice.
financially distressed client at less c. National court that has issued a valid
than his customary fees. subpoena.
d. Own preferred stock in a corporation d. Disciplinary body created under
which is an audit client. statute.
78.The Code of Ethics contains both general 82.A CPA who is engaged to prepare an
ethical principles that are aspirational in income tax return has a duty to prepare it
character and also a: in such a manner that the tax is:
a. List of violations that would cause the a. The legal minimum.
automatic suspension of the CPA’s b. Computed in conformity with generally
license. accepted accounting principles.
b. Description of the CPA’s procedures for c. Supported by the client’s audited
responding to an inquiry from trial financial statements.
board. d. Not subject to change upon audit.
c. Set of specific, mandatory rules
describing levels of conduct the 83.The principle of Professional behavior
CPA must observe. requires a CPA to:
d. List of specific crimes that would be a. Perform professional services with due
considered as acts discreditable to the care, competence and diligence.
profession. b. Be straightforward and honest in
performing professional services.
79.According to the Code of Ethics, the
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c. Act in a manner consistent with the
good reputation of the profession 89. The following are represented both to the
and refrain from any conduct which Financial Reporting Standards Council (FRSC)
might bring discredit to the and Auditing and Assurance Standards
profession. Council (AASC), except:
d. Be fair and should not allow prejudice or a. Bangko Sentral ng Pilipinas
bias, conflict of interest or influence of b. Securities and Exchange Commission
others to override objectivity or affect c. Bureau of Internal Revenue
his professional or business judgments. d. Board of Accountancy
84. The communication to the public of facts 90. Which of the following auditor concerns most
about a CPA which are not designed for the likely could be so serious that the auditor
deliberate promotion of that CPA. concludes that a financial statement audit
a. Advertising cannot be conducted?
b. Solicitation a. The entity has no formal written code of
c. Indirect promotion conduct
d. Publicity b. The integrity of the entity’s
management is suspect
85. Which of the following does not belong to c. Procedures requiring segregation of
the group: duties are subject to management
a. Independence of mind override
b. Independence of fact d. Management fails to modify prescribed
c. Independence in mental attitude controls for changes in conditions
d. Independence in appearance
91. Which of the following is a violation of the
86. Safeguards that may eliminate or reduce code of professional ethics for certified
threats to independence to an acceptable public accountants?
level fall in the following categories except: a. A CPA permits his/her name to be used in
a. Safeguards created by the profession, a client's advertising as having verified
legislation or regulation financial data and/or statistical facts with
b. Firm-wide safeguards respect to the client's products.
c. Engagement specific safeguards b. Based on information obtained in an
d. Safeguards created by the client. audit, a CPA reports an illegal act of
his client to government authorities.
87. A CPA firm would be reasonable assured of c. Three years after a partner has retired,
meeting its responsibility to provide the remaining partners continue to
professional services that conform with practice under a firm name that includes
professional standards by: the name of the retired partner. The
a. Adherence to GAAS retired partner has severed all
b. Maintaining an attitude of independence connections with the CPA firm.
in its engagements. d. A CPA running for public office uses the
c. Having an appropriate a system of professional designation "CPA" after his
quality control. name on posters employed in connection
d. Joining professional societies that enforce with his election campaign.
ethical standards.
92. A CPA in public accounting is prohibited from
88. The Philippine Code of Ethics requires that performing which of the following actions?
lead engagement partners of listed entities a. Permit the publication of his being the
be rotated at least once every: author of a book.
a. 2 years b. Be a party to a stratagem which
b. 3 years permits a non-CPA to practice
c. 5 years accountancy.
d. 7 years c. Allow his wife to acquire shares in a
corporation's capital stock.
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d. Act as a stock and transfer agent. b. A person representing his/her employer
before government agencies on tax arid
93. A CPA who has been retained by a client that other accounting related matters.
operates in an industry totally new to him c. A person in educational institution
a. May not accept such an engagement. teaching accounting, auditing, business
b. May accept the engagement only if the law, taxation or other technically related
accounting firm specializes in the audit of subjects.
commercial banks. d. A person is appointed as a
c. May accept the engagement after marketing director of a government
attaining a suitable level of owned and controlled corporation.
understanding of the transactions
and accounting practices unique to 97. The criteria for evaluating quantitative
commercial banking. information vary. For example, in the audit
d. May accept the engagement because of historical financial statements by CPA
training as a CPA transcends unique firms, the criteria are usually:
industry characteristics. a. Generally accepted auditing standards.
b. Acceptable financial reporting
94. Which of the following is not an objective of framework
requiring registration of individual CPAs and c. Regulations of the Securities and
Firms of partnership of CPAs engaged in Exchange Commission
public accounting practice? d. Regulations of the Bureau of Internal
a. The required registration will Revenue
give equal opportunities to CPAs in
the practice of their profession. 98. The firm is to be staffed by personnel who
b. It will enable the Board of have attained and maintained the technical
Accountancy to formulate and implement standards and professional competence
rules and regulations more effectively for required to enable them to fulfill their
the enhancement and maintenance of responsibilities with due care is the objective
high professional, ethical, and technical of what quality control policy?
standards of the accounting profession. a. Ethical requirements
c. To protect the public against fraud, b. Leadership responsibilities
deception, unethical practices and from c. Assignment
the consequences of ignorance, d. Monitoring
incompetence and incapacity in the
practice of public accounting. 99. In pursuing a CPA firm's quality control
d. It will help PRC and BOA to identify objectives, a CPA firm may maintain records
and impose corresponding sanctions and indicating which partners or employees of
penalties on individual CPAs. the CPA firm were previously employed by
the CPA firm's clients. Which quality control
95. As used in Republic Act No. 9298, this term element would this be most likely to satisfy?
refers to the area of practice of a. Monitoring.
accountancy b. Human resources.
a. Section c. Ethical requirements.
b. Sector d. Engagement performance.
c. Segment
d. Line 100. An engagement quality control review is
required to be performed:
96. Which of the following does not constitute a a. Immediately after the re-assessment of
practice of accountancy? control risk.
a. A person holding out himself as one b. At engagement completion after the
skilled in the knowledge, science and report is issued.
practice of accounting and as a qualified c. For all audits of financial statements
person to render professional services as of listed entities.
a CPA to more than one client.
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d. For all types of audits, regardless of the subjected to evidence gathering
subject matter of the engagement. procedures.
6. The following statements relate to the three

SET 3 parties involved in an assurance
engagement. Which is correct?
1. The degree of certainty that the practitioner a. The responsible party and the intended
has attained and wishes to convey is: users should always be from different
a. A conveyance. entities.
b. An assertion. b. A practitioner should not accept an
c. A declaration. assurance engagement when the subject
d. An assurance. matter of the engagement requires
specialized skills and knowledge beyond
2. The level of assurance provided by an audit those ordinarily possessed by the
of detecting a material misstatement is practitioner.
referred to as: c. A responsible party is the person
a. Positive assurance. who is responsible for the subject
b. High assurance. matter or the subject matter
c. Reasonable assurance. information.
d. Negative assurance. d. In all assurance engagements, the
responsible party is the engaging party,
3. Of the following, which is the broadest i.e., the party that engages the
concept? practitioner
a. Internal control audit.
b. Audit of financial statements. 7. The assurance report is often addressed to
c. Attestation services. the intended users which may be:
d. Assurance services. a. The party responsible for the subject
matter.
4. In performing attestation services, a CPA will b. Established by agreement between the
normally: professional accountant and the
a. Recommend uses for information. responsible party.
b. Improve the quality of information, or its c. Both A and B
context, for decision makers. d. Neither A nor B
c. Perform market analyses and cost
estimates. 8. When performing an assurance service,
d. States a conclusion about a written professional accountants use standards or
assertion. benchmarks to evaluate or measure the
subject matter of an assurance engagement.
5. Which of the following is not one of the This is known as:
requirements before accepting an assurance a. PFRS.
engagement? b. Assertion.
a. The practitioner should be competent c. Criteria.
and independent. d. Conclusion.
b. The responsible party and the
intended user of assurance report 9. Which of the following services provides
should be from different positive assurance through attestation?
organizations. a. Tax services
c. The practitioner should accept the b. Review
engagement only if the subject matter is c. Auditing
the responsibility of another party d. Accounting services
d. The practitioner should accept the
engagement only if the subject matter is 10. Positive assurance is expressed through:
identifiable and in the form that can be a. Attestation
b. Declaration
Page 22 of 100
c. Conclusion c. Objective advisor on the use of
d. Stating whether anything has come to information.
the auditor's attention that indicates that d. Confidential reviewer.
the financial statements are not
presented fairly. 15. Which of the following statements
concerning consulting services is incorrect?
11. Which of the following statements best a. The performance of consulting services
describes review services? for audit clients does not, in and of itself,
a. Review engagements focus on providing impair the auditor's independence.
assurance on the internal controls of a b. Consulting services differ fundamentally
public company. from the CPA's function of attesting to
b. Review engagements focus on providing the assertions of other parties.
assurance on the assertions contained in c. Consulting services ordinarily
the financial statements of a public involve external reporting.
company. d. Most CPAs, including those who provide
c. Review engagements focus on providing audit and tax services, also provide
advice in a three-party contract. consulting services to their clients.
d. Review engagements focus on
providing limited assurance on 16. In an engagement to perform agreed-upon
financial statements of a private procedures, an auditor is engaged to:
company. a. Use accounting expertise as opposed to
auditing expertise to collect, classify, and
12. A review of a company's financial summarize financial information.
statements by a CPA firm: b. Provide a moderate level of assurance
a. Is similar in scope to an audit and adds that the information is free of material
similar credibility to the statements. misstatement.
b. Is significantly less in scope than an audit c. Provide a high, but not absolute, level of
and results in a report which provides assurance that the information is free of
positive assurance, although not absolute material misstatement.
assurance. d. Carry out those procedures of an
c. Concludes with the issuance of a report audit nature to which the auditor
expressing the CPA's opinion as to the and the entity and any appropriate
fairness of the financial statements. third parties have agreed and to
d. Is designed to provide only report on factual findings.
moderate assurance.
17. Assurance engagements should exhibit the
13. The objective of a review of financial following elements except
statements is to: a. A subject matter
a. Express an opinion on the overall b. Suitable criteria
financial statements. c. Evidence
b. Carry out audit procedures agreed on d. Appropriate professional fees
with the client and other users of report.
c. State whether anything has come to 18. Which of the following is not an element of
the auditor's attention that indicates assurance engagements?
that the financial statements are not a. Subject matter
presented fairly. b. Evidence
d. Assist the client in the preparation of the c. Engagement process
financial statements. d. Suitable criteria
14. When providing consulting services, the CPA 19. Assurance services involve which of the
acts primarily as a(n): following?
a. Independent practitioner. a. Relevance as well as reliability.
b. Expert on compliance with industry b. Nonfinancial information as well as
standards. traditional financial statements.
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c. Electronic databases as well as printed for either reasonable or limited assurance
reports. engagement when:
d. All of the above. I. Circumstances prevent the practitioner
from obtaining evidence required to reduce
20. Assurance engagement include the assurance engagement risk to the
following, except appropriate level.
a. An engagement conducted to provide a II. The responsible party or the engaging
high level of assurance that the subject party imposes a restriction that prevents the
matter conforms in all material respects practitioner from obtaining evidence
with identified suitable criteria. required to reduce assurance engagement
b. An engagement conducted to provide a risk to the appropriate level.
moderate level of assurance that the a. I only
subject matter is plausible in the b. II only
circumstances. c. Either I or II
c. An engagement in accordance with the d. Neither I nor II
Philippine Standard on Assurance
Engagement(s). 25. Reducing assurance engagement risk to zero
d. An engagement to perform agreed- is very rarely attainable or cost beneficial as
upon procedures. a result of the following factors, except
a. The use of selective testing.
21. The subject matter of an assurance b. The fact that much of the evidence
engagement may include available to the practitioner is persuasive
I. Historical or prospective financial rather than conclusive.
information c. The practitioner may not have the
II. Internal controls required assurance knowledge and
III. Compliance with regulation skills to gather and evaluate
a. I and II only evidence.
b. I and III only d. The use of judgment in gathering and
c. II and III only evaluating evidence and forming
d. I, II, and III conclusions based on that evidence.
22. In assertion-based assurance engagements, 26. Which of the following standards are to be
the evaluation or measurement of the applied, as appropriate, in the audit of
subject matter against criteria is performed historical financial information?
by the a. PSAEs
a. Intended users b. PSREs
b. Responsible party c. PSAs
c. Practitioner d. PSRSs
d. AASC
27. Which of the following standards are to be
23. Which of the following statements is true applied to compilation engagements and
concerning evidence in an assurance engagements to perform agreed-upon
engagement? procedures to information?
a. The reliability of evidence is influenced a. PSRSs
not by its nature but by its source. b. PSAs
b. Sufficiency is the measure of the c. PSAEs
quantity of evidence. d. PSREs
c. Obtaining more evidence may
compensate for its poor quality. 28. The Philippine Standards on Review
d. Appropriateness is the measure of the Engagements (PSREs) are to be applied in
quality of evidence, that is, its reliability a. The audit of historical financial
and persuasiveness. information.
24. An unqualified conclusion is not appropriate

Page 24 of 100
b. Assurance engagements dealing with
subject matters other than historical 33. An engagement to perform agreed-upon
financial information. procedures may involve the auditor in
c. The review of both historical and performing certain procedures concerning
prospective financial information. I. Individual items of financial data.
d. The review of historical financial II. A single financial statement.
information. III. A complete set of financial statements.
a. I and II only
29. PSRE 2400 (Engagements to Review b. II and III only
Financial Statements), as amended by the c. I and III only
AASC in February 2008, applies to d. I, II, and III
a. Reviews of any historical financial
information of an audit client. 34. The following contain basic principles,
b. Reviews of historical financial or other essential procedures and related guidance,
information by a practitioner other than consistent with the concepts in the
the entity's auditor. Framework, for the performance of
c. Reviews of historical financial or other assurance engagements, except
information of an audit client. a. PSAs
d. Reviews of any historical financial b. PSREs
information by a practitioner other c. PSAEs
than the entity's auditor. d. PSRSs
30. When performing a compilation 35. CPAs in public practice who perform
engagement, the accountant is required to assurance engagements are governed by
a. Make inquiries of management to assess the following, except
the reliability and completeness of the a. Framework for Assurance Engagements
information provided. b. Philippine Standards on Quality Control
b. Assess internal controls. c. Code of Ethics for Professional
c. Verify matters and explanations. Accountants in the Philippines
d. Obtain a general knowledge of the d. AASC's Engagement Standards
business and operations of the (PSAs, PSREs, PSAEs, and PSRSs)
entity.
36. The Philippine Framework for Assurance
31. Each page of the financial information Engagements
compiled by the accountant should include a. Provides a frame of reference for CPAs in
the following reference, except public practice when performing audits,
a. "Unaudited" reviews, and compilations of historical
b. "Compiled, Negative Assurance financial information.
Expressed" b. Contains basic principles, essential
c. "Compiled without Audit or Review" procedures, and related guidance for the
d. "Refer to Compilation Report" performance of assurance engagements.
c. Establishes standards and provides
32. An auditor may accept an engagement to procedural requirements for the
perform specified procedures on the specific performance of assurance engagements.
subject matter of specified elements, d. Defines and describes the elements
accounts, or items of a financial statement if and objectives of an assurance
a. The report does not list the procedures engagement, and identifies
performed. engagements to which PSAs, PSREs,
b. The auditor is also the entity's continuing and PSAEs apply.
auditor.
c. The financial statements are prepared in 37. The procedures employed in doing
accordance with a special purpose compilation are:
framework. a. Designed to enable the accountant to
d. Use of the report is restricted. express a limited assurance
Page 25 of 100
b. Designed to enable the accountant to a. Management advisory services
express a negative assurance b. Reporting on financial statements
c. Not designed to enable the prepared using other comprehensive
accountant to express any form of basis of accounting.
assurance c. compilation of financial information
d. Less extensive than review procedures d. preparation of tax returns
but more extensive than agreed-upon
procedures 43. Which of the following services provides a
moderate level of assurance about the
38. Which of the following procedures is client's financial statements?
normally performed in connection with a a. Forecasts and projections
compilation engagement? b. Compliance with contractual agreement
a. Inquire of management about c. Review
subsequent events d. Compilation
b. Making inquiries of management
concerning actions taken at board 44. When an independent auditor is approached
meeting to perform an audit for the first time, he/she
c. Applying analytical review procedures should make inquiries of the predecessor
d. Collect, classify and summarize auditor. Inquiries are necessary because the
financial information. predecessor may be able to provide the
successor with information that will assist
39. An engagement to apply agreed-upon the successor in determining whether
procedure engagement may be accepted, a. A certain amount of audit fee will be
provided acceptable to the client.
a. The CPA has audited the financial b. An unqualified opinion may be issued.
statements of the client. c. The audit documentation by the
b. The CPA is independent with respect to predecessor auditor can be utilized.
the client. d. The engagement proposal should be
c. The distribution of the report will be accepted.
limited only to specified parties
involved. 45. Before accepting an audit engagement, a
d. The adequacy of the procedures to be successor auditor should make specific
performed will be determined by the CPA. inquiries of the predecessor auditor
regarding the predecessor's
40. Pronouncements of Auditing and Assurance a. Evaluation of all matters of continuing
Standards Council (AASC) do not cover accounting significance.
a. Review engagement b. Understanding as to the reasons for
b. Compilation engagement the change of auditors.
c. Consultancy c. Awareness of the consistency in the
d. Agreed-upon procedures engagement application of GAAP between periods.
d. Opinion of any subsequent events
41. What is the most likely course of action that occurring since the predecessor's audit
will be taken by an auditor in assessing report was issued.
management integrity?
a. Tour the client premises. 46. Before accepting an engagement to audit a
b. Research the prospective client’s related new client, a CPA is required to obtain
parties. a. An understanding of the prospective
c. Research the background and client’s industry and business.
histories of officers b. The prospective client’s signature to the
d. Review the minutes of the board of engagement letter.
directors c. A preliminary understanding of the
prospective client’s control environment.
42. Which of the following is an example of an
assurance engagement?
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d. The prospective client’s consent to c. Evaluate client’s integrity.
make inquiries of the predecessor d. Evaluate financial condition of the client.
auditor, if any.
51. A successor auditor most likely would make
47. Before accepting an audit engagement, a specific inquiries of the predecessor auditor
successor auditor should make specific regarding
inquiries of the predecessor auditor a. Specialized accounting principles of the
regarding client's industry.
a. Disagreements the predecessor had b. Disagreements with management as
with the client concerning auditing to auditing procedures.
procedures and accounting c. The competency of the client's internal
principles. audit staff.
b. The predecessor’s evaluation of matters d. The uncertainty inherent in applying
of continuing accounting significance. sampling procedures.
c. The degree of cooperation the
predecessor received concerning the 52. Which of the following will an auditor least
inquiry of the client’s lawyer. likely discuss with the former auditors of a
d. The predecessor’s assessments of potential client prior to acceptance?
inherent risk and judgments about a. Disagreements with management
materiality. regarding accounting principles
b. Integrity of management
48. Which of the following factors would most c. Fees charged for services
likely cause a CPA to decide not to accept a d. Reasons for changing audit firms
new audit engagement?
a. The CPA’s lack of understanding of the 53. Prior to the acceptance of an audit
prospective client’s internal auditor’s engagement with a client who has
computer-assisted audit techniques. terminated the services of the predecessor
b. Management’s disregard of its auditor, the CPA should
responsibility to maintain an a. Accept the engagement without
adequate internal control contacting the predecessor auditor since
environment. the CPA can include audit procedures to
c. The CPA’s inability to determine whether verify the reason given by the client for
related-party transactions were the termination.
consummated on terms equivalent to b. Contact the predecessor auditor without
arm’s-length transactions. advising the prospective client and
d. Management’s refusal to permit the CPA request a complete report of the
to perform substantive tests before the circumstance leading to the termination
year-end. with the understanding that all
information disclosed will be kept
49. The following are fundamental principles confidential.
that are mostly applied when performing c. Advise the client of the intention to
procedures on acceptance of new clients contact the predecessor auditor and
except: request permission for the contact.
a. Confidentiality. d. Not communicate with the predecessor
b. Professional competence. auditor because this would in effect be
c. Independence. asking the auditor to violate the
d. Professional competence and due care. confidential relationship between auditor
and client.
50. Before continuing the client relationship, the
auditor should perform the following except: 54. Auditing standards require a successor
a. Communicate with the predecessor auditor to communicate with the
auditor. predecessor auditor. The Code of
b. Evaluate client in case of change of Professional Conduct requires confidentiality;
client’s business. therefore, the client's permission must be
Page 27 of 100
obtained before the communication can be b. Evidence to be gathered to provide a
made by sufficient basis for the auditor's opinion.
a. The predecessor auditor. c. Procedures to be undertaken to discover
b. The successor auditor. litigation, claims, and assessments.
c. Both the successor and predecessor d. Pending legal matters to be included in
auditor. the inquiry of the client's attorney.
d. Neither, since this is one of the
exceptions to confidentiality in the Code 59. A written understanding between the
of Professional Conduct. auditor and the client concerning the
auditor's responsibility for the discovery of
55. Which of the following is not done during the illegal acts is usually set forth in a(an)
client selection and retention phase of a. Letter of audit inquiry.
planning? b. Client representation letter.
a. Obtain and review financial information c. Management letter.
b. Consider the need for special skills d. Engagement letter.
c. Ensure that the firm has sufficient
resources to complete the engagement 60. The scope and nature of an auditor's
in a timely manner. contractual obligation to a client is ordinarily
d. Obtain an understanding of internal set forth in the
controls a. Opinion paragraph of the auditor’s
report.
56. Which of the following factors most likely b. Management letter.
would influence an auditor’s determination c. Engagement letter.
of the auditability of an entity’s financial d. Scope paragraph of the auditor’s report.
statements?
a. The complexity of the accounting 61. The primary reason an engagement letter is
system. obtained by audit firms prior to starting the
b. The existence of related-party work is that
transactions. a. It provides an insurance policy for
c. The adequacy of the accounting companies entering into the agreement.
records. b. It clarifies the responsibilities of
d. The operating effectiveness of control management and those of the
procedures. auditor.
c. It communicates the type of opinion that
57. Prior to beginning fieldwork on a new audit will be rendered on the engagement
engagement in which a CPA does not d. It defines the firm's policies and
possess industry expertise, the CPA should procedures regarding new clients.
a. Obtain knowledge of matters that
relate to the nature of the entity's 62. An engagement letter should be written
business and industry. before the start of an audit because
b. Reduce audit risk by lowering the a. It specifies the client's responsibility for
preliminary levels of materiality. preparing schedules and making the
c. Engage financial experts who are familiar records available to the auditor.
with the nature of the industry. b. It may limit the auditor's legal liability by
d. Design special substantive tests to specifying the auditor's responsibilities.
compensate for the lack of industry c. It specifies the basis for billing the audit
expertise. for the upcoming year.
d. All of the above
58. The element of the audit planning process
most likely to be agreed upon with the client 63. Which of the following matters is generally
before implementation of the audit strategy included in an auditor’s engagement letter?
is the determination of the a. Management’s responsibility for the
a. Timing of inventory observation entity’s compliance with laws and
procedures to be performed. regulations.
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b. The factors to be considered in setting d. Our engagement is subject to the risk
preliminary judgments about materiality. that material misstatements or fraud, if
c. Management’s vicarious liability for they exist, will not be detected.
illegal acts committed by its employees.
d. The auditor’s responsibility to search for 67. Arrangements concerning which of the
significant internal control deficiencies. following are least likely to be included in
engagement letter?
64. Which of the following is not included in the a. Internal auditors
engagement letter? b. Predecessor auditor
a. Objectives of the engagement c. Stockholders
b. Management's responsibilities d. Appraisers
c. A clear explanation of the services to be
performed on the engagement 68. When an auditor believes that an
d. Representations that the financial understanding with the client has not been
statements were prepared in established, he or she should ordinarily
accordance with generally accepted a. Perform the audit with increased
accounting principles professional skepticism.
b. Decline to accept or perform the
65. After an auditor had been engaged to audit.
perform the first audit for a nonpublic entity, c. Review the client’s financial reports.
the client requested to change the d. Obtain information about the client’s
engagement to a review. In which of the business and the industry where it
following situations would there be a operates.
reasonable basis to comply with the client's
request? 69. Select the proper reply as to the allowable
a. Management refused to sign the client form of the understanding with a client when
representation letter. an audit is being performed.
b. The client's bank required an audit a. While preferably written, it may be
before committing to a loan, but the oral; but in all cases it should be
client subsequently acquired documented in the working papers.
alternative financing. b. While preferably written, it may be oral,
c. The auditor was prohibited by the client in which case it need not be documented
from corresponding with the client's legal in the working papers.
counsel. c. The understanding may be in any form,
d. The auditing procedures were such as oral or written.
substantially complete and the auditor d. The understanding must be obtained in
determined that an unqualified opinion written form and included in the working
was warranted, but there was a papers.
disagreement concerning the audit fee.
70. In auditing the financial statements of Star
66. Which of the following statements would Corp., Land discovered information leading
least likely appear in an auditor’s Land to believe that Star’s prior year’s
engagement letter? financial statements, which were audited by
a. Fees for our services are based on our Tell, require substantial revisions. Under
regular per diem rates, plus travel and these circumstances, Land should
other out-of-pocket expenses. a. Notify Star’s audit committee and
b. During the course of our audit we may stockholders that the prior year’s
observe opportunities for economy in, or financial statements cannot be relied on.
improved controls over, your operations. b. Request Star to reissue the prior year’s
c. After performing our preliminary financial statements with the appropriate
analytical procedures we will discuss revisions.
with you the other procedures we c. Notify Tell about the information and
consider necessary to complete the make inquiries about the integrity of
engagement. Star’s management.
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d. Request Star to arrange a meeting b. Less evidence is required.
among the three parties to resolve c. Special care is required in assigning
the matter. experienced staff.
d. Review of the working papers by
71. Orange Corp. has a few large accounts personnel who were not assigned to the
receivable that total P2,000,000. Yellow engagement.
Corp. has a large number of small accounts
receivable that also total P2,000,000. The 76. To obtain an understanding of a continuing
importance of an error in any one account is, client’s business in planning an audit, an
therefore, greater for Orange Corp. than for auditor most likely would
Yellow Corp. This is an example of the a. Read specialized industry journals.
auditor's concept of: b. Review prior year working papers
a. Materiality. and the permanent file for the
b. Reasonable assurance. client.
c. Comparative analysis c. Reevaluate the client’s internal control
d. Relative risk. environment.
d. Perform tests of details of transactions
72. The relationship between materiality and and balances.
audit risk is:
a. Indeterminable 77. The management responsibility to detect
b. Direct. and prevent fraud and error is accomplished
c. Inverse. by
d. Materiality and audit risk have no a. Having an annual audit of financial
relationship statements.
b. Implementing adequate quality control
73. An auditor should design a written audit system.
program so that: c. Implementing adequate accounting
a. All material transactions will be selected and internal control system.
for substantive testing. d. Issuing a representation letter to the
b. Substantive tests prior to the balance auditor.
sheet date will be minimized.
c. The audit procedures selected will 78. Which of the following statements best
achieve specific audit objectives. describes the auditor's responsibility to
d. Each account balance will be tested detect material errors and fraud?
under either tests of controls or tests of a. The auditor is responsible for the failure
transactions. to detect material errors and frauds only
when such failure results from the
74. Audit programs are modified to suit the misapplication of generally accepted
circumstances on particular engagements. accounting principles.
A complete audit program for an b. The auditor is responsible for the failure
engagement generally should be developed to detect material errors and frauds only
a. Prior to beginning the actual audit work. when the auditor fails to confirm
b. After the auditor has completed an receivables or observe inventories.
evaluation of the existing internal c. The audit should be designed to
accounting control. provide reasonable assurance that
c. After reviewing the client's accounting material errors and fraud are
records and procedures. detected.
d. When the audit engagement letter is d. Extended auditing procedures are
prepared. required to detect unrecorded
transactions even if there is no evidence
75. Which of the following is not a potential that material errors and frauds may exist.
effect of an auditor's decision that a lower
acceptable audit risk is appropriate?
a. More evidence is required.
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79. Which of the following procedures would an c. When there is greater manual
auditor be most likely to perform in planning intervention for data collection and
a financial statement audit? processing.
a. Reviewing investment transactions of the d. Complex calculations or accounting
audit period to determine whether principles is involved.
related parties were created.
b. Performing analytical procedures to 83. The following are assurance engagements
identify areas that may represent except
specific risks. a. Tax consulting
c. Obtaining a written representation letter b. Financial statements audit
from the client to emphasize c. Review of financial statements
management's responsibilities. d. Information system reliability services
d. Reading the minutes of stockholder and
director meetings to discover whether 84. Engagements frequently performed by
any unusual transactions have occurred. professional accountants that are not
assurance engagements include the
80. A CPA is conducting the first audit of a following except
client’s financial statements. The CPA hopes a. Compilation
to reduce the audit work by consulting with b. Agreed-upon procedures.
the predecessor auditor and reviewing the c. Compliance audit
predecessor's working papers. This d. Management consulting.
procedure is
a. Acceptable if the CPA refers in the audit 85. When the professional accountant has
report to reliance upon the predecessor obtained sufficient appropriate evidence to
auditor's work. conclude that the subject matter conforms in
b. Required if the CPA is to render an all material respects with identified suitable
unqualified opinion. criteria, he or she can provide what level of
c. Unacceptable because the CPA should assurance?
bring an independent viewpoint to a new a. None
engagement. b. High
d. Acceptable if the client and the c. Absolute
predecessor auditor agree to it. d. Moderate
81. PSA 315 requires that the auditor should 86. The Framework of PSA applies to
obtain an understanding of relevant a. Taxation
industry, regulatory and other external b. Consultancy
factors including the applicable financial c. Accounting advice
reporting framework. Which of the following d. Compilation
is not among the items that relate to
industry conditions? 87. Which of the following procedures ordinarily
a. Energy, supply and cost performed during an audit are also
b. Inflation and currency revaluation performed in review?
c. Market and competition a. Assessment of accounting and internal
d. Cyclical or seasonal activity control systems
b. Test of controls
82. The risk of material financial statement c. Tests of records and of responses to
misstatement may be greater when the inquiries
following conditions exist except d. Inquiry and analytical procedures
a. When there is greater management
intervention to specify the accounting 88. Which statement is incorrect regarding the
treatment. pronouncements of AASC?
b. When there is sufficient personnel a. The PSAs and Interpretations may also
with appropriate accounting and have application, as appropriate, to other
financial reporting skills. related activities of auditors.
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b. PSAs contain basic principles and responsibility, it is referred to as
essential procedures (identified in bold independence in
type black lettering) together with a. Fact.
related guidance in the form of b. Appearance.
explanatory and other material. c. Conduct.
c. PSAs need only be applied to material d. Total.
matters.
d. The Interpretations have the same 94. When the users of financial statements have
authority as the PAPSs. confidence in the independence of the CPA,
it is referred to as in independence in
89. The amount of audit fees depend largely on a. Fact.
the b. Appearance.
a. Size and capitalization of the company c. Conduct.
under audit. d. Total.
b. Amount of profit for the year.
c. Availability of cash. 95. Which of the following statements is
d. Volume of audit work and degree of incorrect?
competence and responsibilities a. CPAs lose their independence if they
involved. acquire any direct financial interest in a
client.
90. In determining audit fees, an auditor may b. CPAs lose their independence if they
take into account each of the following have a material direct financial interest in
except a client.
a. Volume and intricacy of work involved. c. CPAs lose their independence if they
b. Number and cost of manhours needed. acquire any indirect financial
c. Degree of responsibility assumed. interest in a client.
d. Size and amount of capital of client. d. CPAs lose their independence if they
acquire a material indirect financial
91. Under this method of billing a client, the interest in a client.
external auditors charges on the basis of
time spent by principals/partners, 96. Which of the following statements is not a
supervisors, seniors and juniors at distinction between independent auditing
predetermined rates agreed upon with the and internal auditing?
client a. Independent auditors represent third
a. Maximum fee basis party users external to the auditee
b. Flat sum basis entity, whereas internal auditors report
c. Retainer basis directly to management.
d. Per diem basis b. Internal auditors are employees of the
auditee, whereas independent auditors
92. Which of the following will impair the are independent contractors.
independence of a CPA in public practice? c. The internal auditor's span of coverage
a. He has his name and address listed on a goes beyond financial auditing to
one-page section of the telephone book. encompass operational and performance
b. He obtained a loan from a bank under auditing.
the normal lending procedures, terms d. Although independent auditors
and requirements of that bank. strive for both validity and relevance
c. He holds one share of the client's of evidence, internal auditors are
capital stock. concerned almost exclusively with
d. He failed to disclose a client's departure validity.
from GAAP.
97. Which of the following is a correct
93. When CPAs are able to maintain an qualification of the Chairman and Two
independence attitude in fulfilling their Commissioners of the Commission on Audit?
a. A citizen of the Philippines.
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b. At least 40 years of age upon
appointment.
c. Must not have been candidates for SET 4
any elective position preceding
appointment. 1. A professional accountant has a
d. CPA’s with no less than 5 years of professional duty or right to disclose
auditing experience or members of confidential information in each of the
Philippine bar who have been engaged in following, except:
law practice for at least 5 years. a. To comply with technical standards and
ethics requirements.
98. The 1986 Constitution provides that the b. To disclose to BIR fraudulent scheme
Chairman and Commissioners of the committed by the client on payment
Commission on Audit shall be of income tax.
a. All lawyers c. To comply with the quality review of a
b. All Certified Public Accountants member body or professional body
c. Two lawyers and one CPA d. To respond to an inquiry or investigation
d. One or two lawyers and one or two by a member body or regulatory body.
CPAs for a total of three
2. Which of the following best describes the
99. Which statement is correct regarding the passing of confidential information from a
relationship between internal auditing and client to its auditor? The information:
the external auditor? a. Should in no circumstances be conveyed
a. Some judgments relating to the audit of to third parties.
the financial statements are those of the b. Is not legally protected and can be
internal auditor. subpoenaed by a competent court.
b. The external audit function's objectives c. Can only be released for peer reviews
vary according to management's after receiving permission from the
requirements. client.
c. Certain aspects of internal auditing d. Should be conveyed to the public if it
may be useful in determining the affects the "correctness" of the financial
nature, timing and extent of statements.
external audit procedures.
d. The external auditor is responsible for 3. If an auditor had a substantial stock
the audit opinion expressed, however investment in a client that s(he) was
that responsibility may be reduced by auditing, which of the following would be
any use made of internal auditing. true?
a. The auditor would lack
100. Which of the following is incorrect independence.
regarding the Philippine Standards on b. The auditor would be violating the PASB
Assurance Engagements (PSAE)? standards.
a. It provides an overall framework for c. The auditor would be violating the
assurance engagements intended to Institute of Management Accounting
provide either a high or moderate level of standards
assurance. d. The auditor would be violating the IIA
b. When a professional accountant is standards.
engaged to perform an assurance
engagement for which specific standards 4. The CPA must not subordinate his or her
exist, those standards apply. professional judgment to that of others in
c. It provides basic principles and every
essential procedures for a. Engagement.
engagements intended to provide a b. Audit engagement.
moderate level of assurance. c. Engagement except tax services.
d. If no specific standards exist for an d. Engagement except management
assurance engagement, PSAE apply.
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advisory services. b. A review.
c. A compilation used only by
5. Which of the following is an indication of lack management.
of objectivity of an auditor? d. An audit of prospective financial
a. The auditor believes that accounts information.
receivable may not be collectible,
but accepts management's opinion 10. Which one of the following contingent fee is
without an independent evaluation. allowed?
b. In preparing client's tax return, the CPA a. All services performed by a CPA firm.
encourages client to take a deduction b. Non-attestation services.
which the CPA believes is valid, but for c. Non-attestation services, unless the
which there is some but not complete CPA firm was also performing
support. attestation services for the same
c. Both a and b above would be a violation client.
d. Neither would be a violation d. Attestation services.
6. A CPA in public practice shall not disclose 11. A violation of the ethical standards would
any confidential client information without most likely have occurred when a CPA
the specific consent of the client. The a. Made arrangement with a bank to collect
confidentiality rule is violated if CPA notes issued by a client in payment of
disclosed information without client's fees due.
consent as a result of a b. Joined an accounting firm made up of
a. Subpoena or summons. three non-CPA practitioners.
b. Peer review. c. Issued an unqualified opinion on the
c. Request by client's largest 2006 financial statements when fees
stockholder. for the 2005 audit were unpaid.
d. Complaint filed with the trial board of the d. Purchased a bookkeeping firm's practice
Board of Accountancy.: of monthly write-ups for a percentage of
fees received over a three-year period.
7. The confidential relationship applies to
a. All services provided by CPAs. 12. The concept of materiality would be least
b. Only audit and attestation services. important to an auditor when considering
c. Audit and tax services, but no MAS the
services. a. Decision whether to use positive or
d. Audit and MAS services, but not tax negative confirmations of accounts
services. receivable.
b. Adequacy of disclosure of a client's illegal
8. The confidential relationship will be violated act.
if, without client's permission, the CPA c. Discovery of weaknesses in a client's
provides working papers about client to internal control structure.
a. A court of law which subpoenas them. d. Effects of a direct financial interest
b. Another CPA firm as part of a peer in the client upon the CPA's
review. independence.
c. Another CPA firm which has just
purchased the CPA's entire practice. 13. Which of the following is a violation
d. An investigative or disciplinary body Confidentiality rule of the Code of Ethics?
which is conducting a review of the CPA's a. The CPA, in response to a court
practice. subpoena, submits auditor-prepared
workpapers as evidence of possible
9. A member in public practice may perform for illegal acts perpetrated by the client.
a contingent fee any professional services b. The CPA discloses to the board of
for a client for whom the member or directors a scheme concocted by top
member's firm performs management to intentionally inflate
a. An audit. earnings.
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c. The CPA warns Client B as to the a. Actual fee would be substantially
inadvisability of acquiring Client A. higher.
The CPA bases this warning on b. Actual fee would be substantially lower
knowledge of Client A's financial than the fees charged by other members
condition and a belief that the for comparable services.
management of Client A lacks c. Fee was a competitive bid.
integrity. This knowledge was d. Member would not be independent.
obtained by the CPA as a result of
auditing Client A during the past 18. In which of the following instances would the
several year is. independence of the CPA not be considered
d. The CPA, when questioned in court, to be impaired? The CPA has been retained
admits to knowledge of certain illegal as the auditor of a brokerage firm
acts perpetrated by the client. a. Which owes the CPA audit fees for more
than one year.
14. An auditor who accepts an audit b. In which the CPA has a large active
engagement and does not possess the margin account.
industry expertise of the business entity, c. In which the CPA's brother is the
should controller.
a. Engage, financial experts familiar with d. Which owes the CPA audit fees for
the nature of the business entity. services in the current year and has
b. Obtain a knowledge of matters that just filed a petition for bankruptcy.
relates to the nature of the entity's
business. 19. In performing an audit, Jackson, CPA,
c. Refer a substantial portion of the audit to discovers that the professional competence
another cpa who will act as the principal necessary for the engagement is lacking.
auditor. Jackson informs management of the
d. First inform management that an situation and recommends another local
unqualified opinion cannot be issued. firm, and management engages this other
firm. Under these circumstances,
15. In determining estimates of fees, an auditor a. Jackson may request compensation
may take into account each of the following, from the other firm for any
except the: professional services rendered to it
a. Value of the service to the client in connection with the engagement.
b. Degree of responsibility assumed by b. Jackson may accept a referral fee from
undertaking the engagement. the other firm.
c. Skills required to perform the service. c. Jackson has violated the AICPA Code of
d. Attainment of specific findings. Professional Conduct because of
nonfulfillment of the duty of
16. A CPA, while performing an audit, strives to performance.
achieve independence in appearance in d. Jackson's lack of competence should be
order to construed to be a violation of generally
a. Reduce risk and liability. accepted auditing standards.
b. Comply with the generally accepted
standards of fieldwork. 20. Which of the following fee arrangements is
c. Become independent in fact. in violation of the Code of Professional
d. Maintain public confidence in the Conduct?
profession a. A fee based on whether the CPA's
report on the client's financial
17. The IFAC Code of Professional Conduct will statements results in the approval
ordinarily be considered to have been of a bank loan.
violated when the member represents that b. A fee based on the outcome of a
specific consulting services will be bankruptcy proceeding.
performed for a stated fee and it is apparent c. A fee based on the nature of the service
at the time of the representation that the rendered and the CPA's particular
Page 35 of 100
expertise instead of the actual time spent c. Observation and inspection.
on the engagement. d. Inquiries of management
d. A fee based on the fee charged by the
prior auditor. 25. PSA 315 requires:
a. Obtaining an understanding of the entity
21. Richard, CPA, performs accounting services and its environment
for Norton Corporation. Norton wishes to b. Identifying and assessing the risks of
offer shares to the public and asks Richard material misstatement
to audit the financial statements. Richard c. Discussion among engagement team
refers Norton to Cruz, CPA, who is more members about the risk of material
competent in the area of registration misstatement in the financial statements.
statements. Cruz performs the audit of d. All of the above
Norton's financial statements and
subsequently thanks Richard for the referral 26. A time budget is an estimate of the total
by giving Richard a portion of the audit fee. hours an audit is expected to take. The
Richard accepts the fee. Who, if anyone, following are among the factors to be
has violated professional ethics? considered in developing this budget, except
a. Only Richard a. Client's size as indicated by its gross
b. Both Richard and Cruz assets, sales, number of employees.
c. Only Cruz b. Location of client facilities.
d. Neither Richard nor Cruz c. The competence and experience of
available staff.
22. Which of the following would not fit the d. Whether the audit is performed
description of a related-party transaction? during the interim or at year-end.
a. An unusually large sale of
merchandise to the company's best 27. The extent of audit planning will vary
and largest customer. according to the following:
b. Sales of merchandise between a parent a. Auditor’s experience with the entity.
company and its subsidiary. b. The nature and complexity of the audit
c. Exchanges of equipment between two engagement.
companies owned by the same person. c. Size of the entity.
d. Loans to corporate officers at market d. All of the above.
rates of interest with a regular
repayment schedule. 28. The audit plan should (select the exception)
a. Be flexible
23. The audit work performed by each assistant b. Precede performance of procedures
should be reviewed to determine whether it c. Succeed action
was adequately performed and to evaluate d. Be cost-beneficial
whether the
a. Results are consistent with the 29. The establishment of an overall audit
conclusions to be presented in the strategy involves
auditor's report. I. Determining the characteristics of the
b. Audit procedures performed are engagement that define its scope.
approved in the professional standards. II. Ascertaining the reporting objectives of
c. Audit has been performed by persons the engagement to plan the timing of the
having adequate technical training and audit and the nature of the
proficiency as auditors. communications required.
d. Auditor's system of quality control has III. Considering the important factors that
been maintained at a high level. will determine the focus of the
engagement team's efforts.
24. Risk assessment procedures include the a. I and II only
following, except b. I and III only
a. Analytical procedures. c. II and III only
b. Confirmation of accounts receivable. d. I, II, and III
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d. Taxation.
30. In the planning stage of an audit
engagement, the auditor is required to 34. PSA requires that the auditor should obtain
perform audit procedures to obtain an an understanding of the entity's objectives
understanding of the entity and its and strategies, and the related business
environment, including its internal control. risks that may result in material
These procedures are called misstatement of the financial statements.
a. Substantive tests Which of the following is not an example of
b. Tests of controls business risks that may have financial
c. Risk assessment procedures consequences and may affect the financial
d. Dual-purpose tests statements?
a. A contracting customer base due to
31. In planning the audit engagement, the industry consolidation that may increase
auditor should consider each of the the risk of misstatement associated with
following, except the valuation of receivables.
a. Matters relating to the entity's business b. Contracting economy.
and the industry in which it operates. c. New accounting requirements.
b. Materiality level and audit risk. d. Use of new IT.
c. The kind of opinion (unmodified,
qualified, or adverse) that is likely to 35. Auditors perform analytical procedures in
be expressed. the planning stage of an audit for the
d. The entity's accounting policies and purpose of:
procedures. a. Determining which of the financial
statement assertions are the most
32. The auditor's understanding of the entity important for the client's financial
and its environment consists of an statements.
understanding of the following aspects b. Determining the nature, timing, and
except extent of audit procedures for auditing
a. Industry, regulatory, and other external the inventory.
factors, including the applicable financial c. Deciding the matters to cover in an
reporting framework. engagement.
b. Nature of the entity, including the d. Identifying unusual conditions that
entity's selection and application of deserve more auditing effort.
accounting policies.
c. Measurement and review of the entity's 36. For initial audits, additional matters the
financial performance. auditor may consider in the overall audit
d. Entity's selection and screening strategy and audit plan include the following
process of marketing and production except
personnel. a. Major issues including the application of
accounting principles or any auditing and
33. PSA 315 requires that the auditor should reporting standards discussed with
obtain an understanding' of relevant management.
industry, regulatory and other external b. Confirmation of material accounts
factors including the applicable financial receivable balance at the end of the
reporting framework. Which of the year.
following is not an example of matters c. Planned audit procedure to obtain
relating to regulatory environment that the sufficient appropriate audit evidence
auditor would usually consider? regarding opening balances.
a. Regulatory framework for a regulated d. Assignment of firm personnel with
industry. appropriate levels of capabilities and
b. Product technology relating to the competence to respond to anticipated
entity's product. significant risks.
c. Legislation and regulation significantly
affecting the entity's operation.
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37. Which of the following would not be found in c. Loans or credit sales to the principal
the corporate charter? owner or client.
a. The date of incorporation. d. Exchanges of equipment between two
b. The rules and procedures adopted companies owned by the same person.
by the stockholders.
c. The kinds and amount of capital stock 42. Most auditors assess inherent risk as high for
authorized. related parties and related-party
d. The types of business activity that the transactions because
corporation is allowed to conduct. a. Of the accounting disclosure
requirement.
38. Which of the following would not usually be b. Of the lack of independence between the
included in the minutes of the board of parties.
directors and/or stockholders? c. Both a and b.
a. Declaration of dividends. d. It is required by generally accepted
b. Authorization of long-term loans. accounting principles.
c. Authorization of individuals to sign
checks. 43. Experience has shown that certain
d. The duties and powers of the conditions in an organization are symptoms
corporate officers. of possible management fraud. Which of the
following conditions would not be considered
39. Which of the following is not an inherent risk an indicator of possible fraud?
that is common to all clients in certain a. Managers are regularly assuming
industries? subordinates' duties
a. Accounts receivable collection in the b. Managers are subject to formal
consumer loan industry. performance reviews on a regular
b. Potential inventory obsolescence in the basis.
fashion clothes industry. c. Managers are dealing in matters outside
c. Brand loyalty in the cosmetics their profit center's scope
industry. d. Managers are not complying with
d. Reserve for loss in the casualty insurance corporate directives and procedures
industry.
44. The nature of the entity refers to the
40. Transactions with related parties are following, except:
important to the auditors because they will a. The types of investments that it is
be disclosed in the financial statements if making and plans to make.
material. Generally accepted accounting b. Other external factors, such as
principles would not require disclosure of general economic conditions.
a. Loans to officers during the year c. The way that the entity is structured and
which had been repaid before the how it is financed.
balance sheet date. d. The entity's operations, its ownership,
b. The nature of the related-party and governance.
relationship.
c. A description of transactions, including 45. These result from significant conditions,
peso amounts. events, circumstances, actions or inactions
d. The amounts due from and to related that could adversely affect the entity’s
parties. ability to achieve its objectives and execute
its strategies or through the setting of
41. Which of the following would not be inappropriate objectives and strategies.
classified as a related-party transaction? a. Business failure
a. Sales of merchandise between affiliated b. Information risk
companies. c. Business obstacles
b. An advance of one week's salary to d. Business risk
an employee.

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46. These are the operational approaches by to a client irrespective of their functional
which management intends to achieve its classification (e.g., audit, tax or
objectives. consulting) and professional accountants
a. Business risk approaches in a practice having managerial
b. Strategies responsibilities.
c. Planning methods
d. Operational plans. 50. How did the Code of Ethics define public
interest?
47. The auditor's understanding of the entity a. A distinguishing mark of a profession is
and its environment consists an the acceptance of its responsibility to the
understanding of the following aspects: public.
a. Industry, regulatory and other external b. The accountancy profession's public
factors, including the applicable financial consists of clients, credit grantors,
reporting framework governments, employers, employees,
b. Nature of the entity, including the investors, the business and financial
entity's selection and application of community, and others who rely on the
accounting policies objectivity and integrity of professional
c. Objectives and strategies and the related accountants.
business risks that may result in a c. The collective well-being of the
material misstatement of the financial community of people and
statements institutions the professional
d. All of these. accountant serves.
d. The standards of the accountancy
48. There are fundamental principles that the profession are heavily determined by the
professional accountant has to observe public interest.
when performing assurance engagements.
The requirement of which principle is of 51. Independent auditors of financial statements
particular importance in an assurance perform audits that reduce and control
engagement in ensuring that the conclusion a. Business risk faced by investors
of the professional accountant has value to b. Information risk faced by investors
the intended user? c. Complexity of financial statements
a. Integrity d. Timeliness of financial statements
b. Confidentiality
c. Professional competence 52. Which of the following statements is true?
d. Objectivity a. Professional standards prohibit CPAs from
performing non-assurance engagements.
49. Existing accountant, as defined in the Code b. Absolute assurance is attainable owing to
of Ethics, means the fact that much of the evidence
a. A professional accountant employed in available to the CPA is persuasive rather
industry, commerce, the public sector or than conclusive.
education. c. The CPA’s conclusion provides a
b. Those persons who hold a valid level of assurance about the subject
certificate issued by the Board of matter.
Accountancy. d. The responsible party expresses a
c. A professional accountant in public conclusion that provides a level of
practice currently holding an audit assurance as to whether the subject
appointment or carrying out matter conforms, in all material respects,
accounting, taxation, consulting or with the identified suitable criteria.
similar professional services for a
client. 53. Which of the following best describes the
d. A sole proprietor, or each partner or operational audit?
person occupying a position similar to a. It requires the constant review by
that of a partner and each staff in a internal auditors of the administrative
practice providing professional services controls as they relate to operations of
Page 39 of 100
the company. 58. Most of the independent auditor's work
b. It concentrates on implementing in formulating an opinion on financial
financial and accounting control in a statements consists of
newly organized company. a. Studying and evaluating internal control
c. It concentrates on seeking out b. Obtaining and examining evidential
aspects of operations in which matter
waste would be reduced by the c. Examining cash transactions
introduction of controls. d. Comparing recorded accountability with
d. It attempts and is designed to verify assets
the fair presentation of a company's
results of operations. 59. The overall objective of internal auditing is
to
54. What is the proper organizational role of a. Attest to the efficiency with which
internal auditing? resources are employed.
a. To serve as an independent, b. Ascertain that controls are costs justified.
objective assurance and consulting c. Provide assurance that financial data
activity that adds value to have been accurately recorded.
operations. d. Assist members of the organization
b. To assist the external auditor in order to in the effective discharge of their
reduce external audit fees. responsibilities.
c. To perform studies to assist in the
attainment of more efficient operations. 60. Internal auditing is an independent appraisal
d. To serve as the investigative arm of the function established within an organization
audit committee of the board of to examine and evaluate its activities. To
directors. that end, internal auditing provides
assistance to
55. Which of the following is not one of the a. External auditors
limitations of an audit? b. Stockholders
a. The use of testing c. Management and the board of
b. Limitations imposed by client directors
c. Human error d. Government
d. Nature of evidence that the auditor
obtains 61. An audit which is undertaken in order to
determine whether the auditee is following
56. Which of the following terms does not specific procedures or rules set down by
belong to the group some higher authority is classified as a(n)
a. Financial audit a. Audit of financial statements.
b. Internal audit b. Compliance audit.
c. External audit c. Operational audit.
d. Independent audit d. Production audit.
57. By providing high level of assurance on 62. The most important function of operational
audit reports on financial statements, the audit report is to:
auditor a. Direct management to take specified
a. Guarantees the fair presentation of the actions.
financial statements. b. State the auditor’s opinion or
b. Confirms the accuracy of the financial conclusion.
statements. c. Report findings and
c. Enhances the credibility of the recommendations.
financial statements. d. Report the objective of the audit.
d. Assures the readers that fraudulent
activities of employees have been 63. Operational audit differs in many ways from
detected. an audit of financial statements. Which of
the following is the best example of one of
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these differences? operating results, and changes in cash
a. The usual audit of the financial statement and stockholders' equity.
covers four basic statements, whereas d. To help members of the
operational audit is usually limited either organization to effectively
discharge their responsibilities.
the statement of financial position or the
income statement. 67. Which of the following types of audit uses
b. Operational audit do not necessarily laws and regulations as its criteria?
result in the preparation of a report. a. Operational audit
c. The operational audit deals with pre-tax b. Financial statement audit
income. c. Compliance audit
d. The boundaries of an operational d. Performance audit
audit are often drawn from an
68. An audit that involves obtaining and
organization chart and are not evaluating evidence about the efficiency
limited to a single accounting and effectiveness of an entity's operating
period. activities in relation to specified objectives is
a(n):
64. Which of the following actions would be an a. External audit
appropriate response by companies to b. Compliance audit
improve the public's perception of their c. Operational audit
financial reporting? d. Financial statement audit
a. Requiring internal auditors to report all
significant findings of fraud and illegal 69.A operational audit is primarily oriented
activity to the company president. toward
b. Increased adoption of audit a. Future improvements to accomplish
committees. management’s goals.
c. Keeping external and internal auditing b. Past protection provided by existing
work separated to maintain internal control.
independence. c. Operational information is in
d. None of the above. accordance with generally accepted
accounting principles.
65. Which of the following is considered a d. Financial statements are fairly
primary reason for creating an internal audit presented.
department?
a. To safeguard resources entrusted to the 70. As used in auditing, which of the following
organization. statements best describes "assertions”?
b. To evaluate and improve the a. Assertions are the auditor's findings to be
effectiveness of control processes. communicated in his audit report.
c. To ensure the accuracy, reliability, and b. Assertions are found only in the notes to
timeliness of financial and operating data the financial statements.
used in management's decision making. c. Assertions are the representations of
d. To relieve management of the management as to the reliability of the
responsibility for establishing effective information system.
controls. d. Assertions are the representations
of management as to the fairness of
66. What is the overall objective of internal presentation of the financial
auditing? statements.
a. To attest to the efficiency with which
resources are used. 71. The internal auditing department's
b. Ascertain that the cost of internal responsibility for deterring fraud is to
control is justified. a. Exercise operating authority over fraud
c. To ascertain that financial statements prevention activities.
present accurately the financial position,
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b. Establish an effective internal control
system. 76. Audits of financial statements include an
c. Maintain internal control. expression of a conclusion about which of
d. Examine and evaluate the system of the following financial statement
internal control. characteristics?
a. Governance.
72. Internal auditors review the adequacy of b. Reliability.
the company's internal control system c. Relevance.
primarily to d. Timeliness.
a. Help determine the nature, timing, and
extent of tests necessary to achieve audit 77. There are four conditions that give rise to
objectives. the need for independent audits of
b. Determine whether the internal control financial statements. One of these
system ensures that financial statements conditions is consequence. In this context,
are fairly presented. consequence means that the:
c. Determine whether the internal a. Users of the statements may not fully
control system provides reasonable understand the consequences of their
assurance that the company's actions.
objectives and goals are met b. Auditor must anticipate all possible
efficiently and economically. consequences of the report issued.
d. Ensure that material weaknesses in the c. Impact of using different accounting
system of internal control are corrected. methods may not be fully understood
by the users of the statements.
73. Internal auditors should review the means d. Financial statements are used for
of physically safeguarding assets from losses important decisions.
arising from
a. Procedures that are not cost justified. 78. One of the conditions that give rise to a
b. Exposure to the elements. demand for an external audit of financial
c. Underusage of physical facilities. statements is expertise. Which of the
d. Misapplication of accounting principles. following best describes the meaning of
expertise as used in this context?
74. The essence of the attest function is to a. Auditors usually rely on the work of
a. Detect fraud. an expert as a basis for evaluating
b. Examine individual transactions so that some assertions embodied in the
the auditor can certify as to their financial statements.
validity. b. The readers of the financial statements
c. Determine whether the client's must possess the necessary expertise
financial statements are fairly to be able to understand the financial
stated. statements.
d. Ensure the consistent application of c. Users usually lack the necessary
correct accounting procedures. expertise to verify the reliability of
the financial information.
75. A typical objective of an operational audit d. As experts, auditors are expected to
is to determine whether an entity's detect all material misstatements in the
a. Internal control structure is adequately financial statements.
operating as designed
b. Operational information is in 79. Operational audits generally have been
accordance with generally accepted conducted by internal and COA auditors, but
accounting principles. may be performed by certified public
c. Specific operating units are accountants. A primary purpose of an
functioning efficiently and operational audit is to provide:
effectively a. A measure of management
d. Financial statements present fairly the performance in meeting
results of operations organizational goals.
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b. The results of internal examinations of b. Specific operating units are
financial and accounting matters to a functioning economically and
company's top-level management. efficiently.
c. Aid to the independent-auditor, who is c. Financial statements present fairly the
conducting the examination of the results of operations.
financial statements. d. Internal control is adequately
d. A means of assurance that internal operating as designed.
accounting controls are functioning as
planned. 84. What is the responsibility of an auditor who
is engaged to audit the financial statements
80. Governme ntal auditing often of a government entity?
extends beyond examinations leading a. Assess control risk with respect to each
to the expression of opinion on the component of internal control.
fairness of financial presentation and b. Assume responsibility for assuring that
includes audits of efficiency, economy, the entity complies with applicable laws
effectiveness, and also: and regulations.
a. Accuracy c. Obtain an understanding of the
b. Evaluation possible financial statement effects
c. Compliance of laws and regulations having direct
d. Internal control and material effects on amounts
reported.
81. The internal auditing profession has d. Design the audit to provide reasonable
advanced primarily as a result of assurance that the statements are free of
a. Increased interest by Bachelor of Science material misstatements resulting from
in Accountancy (BSA) graduates and illegal acts having direct or indirect
experienced auditors. effects.
b. The limitation of financial statement
audit scope. 85. Solicitation consists of the various means
c. Job qualification specifications that include that CPA firms use to engage new clients.
added emphasis on background Which one-of the following would not be an
knowledge and skills. example of solicitation?
d. Increased complexity and a. Accepting new clients that approach
sophistication of business the firm.
operations. b. Taking prospective clients to lunch.
c. Offering seminars on current tax law
82. A typical objective of an operational audit is changes to potential clients.
for the auditor to d. Advertisements in the yellow pages of a
a. Determine whether the financial phone book.
statements fairly present the entity's
operations. 86. Which of the following activities is not
b. Evaluate the feasibility of attaining the prohibited for the CPA firm's attestation
entity's operational objectives. service clients?
c. Make recommendation for a. Competitive bidding on audit jobs.
improving performance. b. Contingent fees on audit jobs.
d. Report on the entity's relative success in c. Commissions for obtaining client services
maximizing profits. on audit jobs.
d. Referral fees on audit jobs.
83. An objective of a performance audit is to
determine whether an entity's 87. If requested to perform a review
a. Operational information is in engagement for a nonpublic entity in which
accordance with government auditing an accountant has an immaterial direct
standards. financial interest, the accountant is
a. Independent because the financial
interest is immaterial and, therefore, may
Page 43 of 100
issue a review report. a. The public would be aware of his lack of
b. Not independent and, therefore, may not independence and would place little or
be associated with the financial no faith in his opinion.
statements. b. He would place himself in the position of
c. Not independent and, therefore, suffering an adverse decision in a
may not issue a review report. possible liability suit.
d. Not independent and, therefore, may c. He would be in the position of auditing
issue a review report, but may not issue his own work.
an auditor's opinion. d. Any auditing procedures he might
perform would not be in accordance
88. Which of the following most completely with generally accepted auditing
describes how independence has been standards.
defined by the CPA profession?
a. Performing an audit from the viewpoint of 92. In which of the following circumstances
the public. would a CPA be bound by ethics to refrain
b. Avoiding the appearance of significant from disclosing any confidential information
interests in the affairs of an audit client. obtained during the course of a professional
c. Possessing the ability to act with engagement?
integrity and objectivity. a. The CPA is issue a summons enforceable
d. Possessing the ability to act by a court order which orders the CPA to
professionally and accordance with a present confidential information.
professional code of ethics. b. A major stockholder of a client
company seeks accounting
89. To emphasize auditor independence from information from the CPA after
management, many corporations follow the management declined to disclose
practice of the requested information.
a. Appointing a partner of the CPA firm c. Confidential client information is made
conducting the examination to the available as part of a quality review of
corporation's audit committee. the CPA's practice by a peer review team
b. Establishing a policy of discouraging authorized by the PICPA.
social contact between employees of the d. An inquiry by a disciplinary body of PICPA
corporation and the staff of the requests confidential client information.
independent auditor.
c. Requesting that a representative of the 93. Which of the following best describes why
independent auditor be on hand at the publicly-traded corporations follow the
annual stockholders' meeting. practice of having the outside auditor
d. Having the independent auditor appointed by the board of directors or
report to an audit committee of elected by the stockholders?
outside members of the board of a. To comply with the regulations of the
directors. Accounting Standards Council.
b. To emphasize auditor independence
90. In determining independence with respect to from the management of the
any audit engagement, the ultimate decision corporation.
as to whether or not the auditor is c. To encourage a policy of rotation of the
independent must be made by the independent auditors.
a. Auditor. d. To provide the corporate owners with an
b. Client. opportunity to voice their opinion
c. Audit committee. concerning the quality of the auditing
d. Public. firm selected by the directors.
91. When a CPA who is not independent is 94. The objective of governmental
associated with financial statements, he effectiveness or program auditing is to
would be precluded from expressing an determine if the desired results of a
opinion because program are being achieved. What is the
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first step in conducting such an audit? d. The general audit objectives may vary
a. Identify the legislative intent of the from audit to audit, but the
program being audited. circumstances remain the same.
b. Collect quantifiable data on the
program's success or failure. 98. The work of each assistant needs to be
c. Determine the time frame to be reviewed by personnel of at least equal
audited. competence. Which of the following is not
d. Evaluate the system used to one of the objectives of this requirement?
measure results. a. The conclusions expressed are consistent
with the result of the work performed and
95. Which of the following statements is a support the opinion.
standard applicable to financial b. The work performed and the results
statement audits in accordance with obtained have been adequately
Government Auditing Standards? documented.
a. An auditor should briefly describe in the c. The objectives of the audit procedures
auditor's report the method of statistical have been achieved.
sampling used in per forming tests of d. All available evidences have been
controls and substantive tests. obtained, evaluated and
b. An auditor should report on the documented.
scope of the auditor's testing of
internal control. 99. Every independent audit engagement
c. An auditor should determine the involves both auditing standards and
extent to which the entity's programs auditing procedures. The relationship
achieve the desired level of results. between the two may be illustrated by how
d. An auditor should assess whether the they apply from engagement to
entity has reportable measures of engagement. The best representation of
economy and efficiency that are valid this application is that, from one audit
and reliable. engagement to the next,
a. Both auditing standards and auditing
96. Which of the following is incorrect about procedures are applied uniformly.
responsibility for financial statements? b. Auditing standards are applied uniformly
a. Management is responsible for fair but auditing procedures are optional.
presentation of the financial c. Auditing standards are applied
statements. uniformly but auditing procedures
b. Auditor is responsible for expressing an may vary.
opinion on the financial statements. d. Auditing standards may vary but auditing
c. Audit of financial statements does not procedures are applied uniformly.
reduce management's responsibility.
d. Fair presentation of financial 100. The CPA should not undertake an
statements is an implicit part of the engagement if his fee is to be based upon
auditor's responsibility. a. A percentage of audited net income.
b. Per diem rates plus expenses.
97. Which of the following is correct? c. The findings of a tax authority.
a. The evidence which the auditor d. The complexity of the service rendered.
accumulates remains the same from
audit to audit, but the general objectives
vary, depending on the circumstances. SET 5
b. The general audit objectives remain
the same from audit to audit, but 1. The establishment of the overall audit
the evidence varies, depending on strategy involves
the circumstances. a. Determining the characteristics of the
c. The circumstances may vary from audit engagement that defines its scope.
to audit, but the evidence accumulated
remains the same.
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b. Ascertaining the reporting objectives of a. Audit areas where there is a higher risk
the engagement to plan the timing of the of material misstatement.
audit and the nature of the b. The expected audit coverage,
communications required. including the number and locations
c. Considering the important factors that of the entity's components to be
will determine the focus of the included.
engagement team's efforts. c. The entity's timetable for reporting, such
d. All of the answers as at interim and final stages.
d. The discussion with the entity's
2. Which of the following is least likely to be management concerning the expected
required on an audit? communications on the status of audit
a. Review accounting estimates for biases work throughout the engagement and
b. Test appropriateness of journal entries the expected deliverables resulting from
and adjustment the audit procedures.
c. Make a legal determination of
whether fraud has occurred 6. An auditor should consider materiality when
d. Evaluate the business rationale for I. Determining the nature, timing, and
significant, unusual transactions extent of audit procedures.
II. Evaluating the effect of misstatements.
3. Which of the following should be included in a. I only
the audit plan? b. II only
I. The nature, timing and extent of planned c. Both I and II
risk assessment procedures. d. Neither I nor II
II. The nature, timing and extent of planned
further audit procedures at the assertion 7. It is the amount or amounts set by the
level. auditor at less than materiality for the
a. I only financial statements as a whole to reduce to
b. II only an appropriately low level the probability
c. Both I and II that the aggregate of uncorrected and
d. Neither I nor II undetected misstatements exceeds
materiality for the financial statements as a
4. Which of the following matters would an whole.
auditor least likely consider when setting the a. Lower materiality
direction of the audit? b. Lesser materiality
a. The selection of the engagement team c. Performance materiality
and the assignment of audit work to the d. Materiality
team members.
b. The engagement budget which includes 8. A basic premise underlying analytical
consideration of the appropriate amount procedures is that
of time to allot for areas where there may a. The study of financial ratios is an
be higher risks of material misstatement. acceptable alternative to the
c. The availability of client personnel investigation of unusual fluctuations.
and data. b. Plausible relationships among data
d. The manner in which the auditor may reasonably be expected to exist
emphasizes to engagement team and continue in the absence of
members the need to maintain a known conditions to the contrary.
questioning mind and to exercise c. These procedures cannot replace tests of
professional skepticism in the gathering details of transactions and balances.
and evaluation of audit evidence. d. Statistical tests of financial information
may lead to the detection of material
5. Which of the following matters would an misstatements in the financial
auditor most likely consider when statements.
establishing the scope of the audit?

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9. Which of the following statements accounting process.
concerning analytical procedures is true?
a. Analytical procedures are more efficient, 14. Which of the following is most likely to
but not more effective, than tests of require special planning considerations
details of transactions. related to asset valuation?
b. Analytical procedures used as risk a. Accelerated depreciation methods are
assessment procedures use data used for amortizing the costs of factory
aggregated at a high level. equipment.
c. Analytical procedures can replace tests of b. The client has recently purchased an
controls in gathering audit evidence to expensive copy machine.
support the assessed level of control risk. c. Assets costing less than P5,000 are
d. Analytical procedures usually involve expensed even when the expected life
comparisons of ratios developed from exceeds one year.
recorded amounts with ratios developed d. Inventory is comprised of diamond
by management. rings.
10. In relation to audit planning, the auditor 15. The responsibility for the detection and
should document the following: prevention of errors, fraud and
a. The overall audit strategy. noncompliance with laws and regulations
b. The detailed audit plan. rests with:
c. Significant changes made during the a. Auditor
audit engagement. b. Client's legal counsel
d. All of the answers c. Internal auditor
d. Client management
11. Audit programs generally include procedures
to test actual transactions and resulting 16. The following statements relate to the
balances. These procedures are primarily auditor's responsibility for the detection of
designed to errors and fraud. Which of the statement is
a. Detect irregularities that result in correct?
misstated financial statements. I. Due to the inherent limitations of the
b. Test the adequacy of internal control. audit, there is a possibility that material
c. Gather corroborative evidence. misstatements in the financial
d. Obtain information of informative statements may not be detected.
disclosures. II. The subsequent discovery of material
misstatement of the financial information
12. An audit process is a well-defined resulting from fraud or error does not, in
methodology for organizing an audit to itself, indicate that the auditor failed to
ensure that follow the basic principles and essential
a. The evidence gathered is both sufficient procedures of an audit.
and competent. a. I only
b. All appropriate audit objectives are b. II only
specified. c. Both statements are true
c. All appropriate audit objectives are met. d. Both statements are false
d. All of these
17. Which of the following is not an assurance
13. For a particular assertion, control risk is the that the auditors give to the parties who rely
risk that on the financial statements?
a. Controls will not detect a material a. Auditors know how the amounts and
misstatement that occurs. disclosures in the financial statements
b. Audit procedures will fail to detect a were produced.
weak control system. b. Auditors gathered enough evidence to
c. The prescribed control procedures will provide a reasonable basis for forming an
not be applied uniformly. opinion.
d. A material misstatement will occur in the
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c. Auditors give assurance that the c. Whether it is peso amount or a process.
financial statements are accurate. d. Whether it is a caused by the auditor or
d. If the evidence allows the auditors to do the client.
so, auditors give assurance in the form of
opinion, as to whether the financial 23. Fraudulent financial reporting is often called
statements taken as a whole are fairly a. Misappropriation or theft of assets
presented in conformity with GAAP. b. Management fraud
c. Defalcation
18. Material misstatements in financial d. Employee fraud
statements may arise from all of the
following except 24. In comparing management fraud with
a. Fraud employee fraud, the auditor's risk of failing
b. Error to discover the fraud is
c. Limitations of the audit a. Greater for employee fraud because of
d. Noncompliance with laws and regulations the larger number of employees in the
organization.
19. Which of the following is an example of an b. Greater for management fraud
error? because of management's ability to
a. Defalcation override existing internal controls.
b. Misapplication of accounting c. Greater for employee fraud because of
policies. the higher crime rate among blue collar
c. Suppression or omission of the effects of workers.
transactions from the records or d. Greater for management fraud because
documents. managers are inherently smarter than
d. Recording of transactions without employees.
substance.
25. Which of the following statements about
20. An intentional act by one or more individuals fraud or error is incorrect?
among management, employees, or third a. The responsibility for the prevention and
parties which results in misrepresentation of detection of fraud and error rests with
financial statements refers to management.
a. Illegal acts b. The auditor should plan and perform the
b. Error audit with an attitude of professional
c. Fraud skepticism, recognizing that conditions or
d. Noncompliance events may be found that fraud or error
may exist.
21. The primary factor that distinguishes errors c. The likelihood of detecting fraud is
from fraud is ordinarily higher than that of
a. Whether the misstatement is perpetrated detecting error.
by an employee or by a member of d. The auditor is not and can not be held
management responsible for the prevention of fraud
b. Whether the underlying cause of and error.
misstatement is intentional or
unintentional. 26. Which of the following is an "error" as
c. Whether the misstatement is concealed. distinguished from "fraud"?
d. Whether the underlying cause of a. Lapping
misstatement relates to misapplication of b. Embezzlement of company's fund
accounting principles or to clerical c. Clerical mistakes in the processing
processing. of transactions
d. Window dressing
22. The factor that distinguishes an error from
fraud is 27. Which of the following could be an example
a. Materiality. of fraud?
b. Intent.
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a. Misappropriation of assets or group that does business in numerous foreign
of assets. countries.
b. Errors in the application of the b. The client does business with several
accounting principles. related parties.
c. Clerical errors in accounting data c. Inadequate segregation of duties
underlying the financial statements. places an employee in a position to
d. Misinterpretation of facts that existed perpetrate and conceal thefts.
when financial statements were d. Inadequate employee training results in
prepared. lengthy EDP exception reports each
month.
28. Which of the following is an example of
fraudulent financial reporting? 33. All of the following conditions are indicators
a. Misappropriating collections on accounts of possible pressures on an entity except
receivable a. The industry in which the entity operates
b. Using inappropriate assumptions in is declining.
accounting estimate b. There is inadequate working capital due
c. Stealing inventory to declining profits or too rapid
d. Payments to fictitious employees or expansion.
vendors c. The client is heavily dependent on one or
a few products or customers.
29. These refer to events or conditions that may d. There is a significant and prolonged
indicate an incentive or pressure to commit understaffing of the accounting
fraud or provide an opportunity to commit department.
fraud.
a. Fraud conditions 34. Which of the following is most likely to be a
b. Fraud risk factors response to the auditor's assessment that
c. Fraudulent activities the risk of material misstatement due to
d. Fraud events fraud for the existence of inventory is high?
a. Observe test counts of inventory at
30. The following are fraud risk factors except: certain locations on an unannounced
a. Incentive or pressure to commit fraud basis.
b. Opportunity to commit fraud b. Perform analytical procedures rather than
c. Attitude or rationalization to commit taking test counts.
fraud c. Request that inventories be counted prior
d. All of the above to year end.
d. Request that inventory counts at the
31. Certain characteristics or circumstances may various locations be counted on different
increase the susceptibility of assets to dates so as to allow the same auditor to
misappropriation. Opportunities to be present at every count.
misappropriate assets increase due to the
following except: 35. The term used to refer to acts of omission or
a. Inventory items that are small in size, of commission by the entity being audited,
high value, or in high demand. either intentional or unintentional, which are
b. Known or anticipated future contrary to the prevailing laws and
employee layoffs. regulations is
c. Easily convertible assets, such as bearer a. Misappropriation.
bonds, diamonds, or computer chips. b. Fraud.
d. Fixed assets which are small in size, c. Illegal acts.
marketable, or lacking observable d. Noncompliance.
identification of ownership.
36. Noncompliance with laws and regulations
32. The auditor is most likely to presume that a are also called
high risk of fraud exists if a. Irregularities
a. The client is a multinational company b. Illegal acts
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c. Misappropriation b. Eliminating the need to observe the
d. Defalcation physical inventory taking.
c. Allowing the external auditor to limit
37. The responsibility for the detection and his/her audit to the performance of
prevention of noncompliance with laws and substantive test procedures.
regulations rests with d. Limiting direct testing by the external
a. The auditor auditor to management assertions not
b. The client's legal counsel directly tested by internal auditing.
c. The auditor’s legal counsel
d. The client management 42. The external auditor should obtain a
sufficient understanding of the internal audit
38. The term “noncompliance” as used in PSA function because
250 refers to acts of omission or commission a. The understanding of the internal audit
by the entity being audited, either function is an important substantive test
intentional or unintentional, which are to be performed by the external auditor.
contrary to the prevailing laws or b. The audit programs, working papers, and
regulations. Such acts include the following reports of internal auditors may often be
except used as a substitute for the work of the
a. Transactions entered into by the entity external auditor's staff.
b. Transactions entered into in the name of c. The procedures performed by the internal
the entity audit staff may eliminate the external
c. Transactions entered into by the entity on auditor's need for considering internal
its behalf by its management or control.
employees d. The work performed by internal
d. Personal misconduct (unrelated to auditors may be a factor in
the business activities of the entity) determining the nature, timing, and
by the entity’s management or extent of the external auditor's
employees. procedures.
39. As part of audit planning, CPAs should 43. In determining whether the work of the
design audit programs for each individual internal auditors is likely to be adequate for
audit and should include audit steps and purposes of the audit, the external auditor
procedures to shall evaluate the internal auditor's
a. Ensure that only material items are a. Efficiency and experience
audited. b. Competence and objectivity
b. Provide assurance that the c. Independence and review skills
objectives of the audit are met. d. Training and supervisory skills
c. Detect and eliminate fraud.
d. Increase the amount of management 44. In assessing the technical competence of an
information available. internal auditor, an external auditor most
likely would obtain information about the
40. How can the audit program best be a. Organizational level to which the internal
described at the beginning of the audit auditor reports.
process? b. Quality of working paper
a. Conclusive documentation, reports, and
b. Confirmed recommendations.
c. Optional c. Influence of management on the internal
d. Temporary auditor's duties.
d. Entity's commitment to integrity and
41. Internal auditing can affect the scope of the ethical values.
external auditor's audit of financial
statements by 45. Given that an audit in accordance with
a. Decreasing the external auditor's generally accepted auditing standards is
need to perform detailed tests. influenced by the possibility of material
Page 50 of 100
errors and fraud, the auditor should conduct a. Planning is a continual and iterative
the audit with an attitude of process.
a. Professional responsiveness. b. Planning is a discrete phase of an
b. Conservative advocacy. audit.
c. Professional skepticism. c. In a recurring audit, planning often
d. Objective judgment. begins shortly after (or in connection
with) the completion of the previous
46. The primary difference between financial audit and continues until the completion
statement errors and fraud is that of the current audit engagement.
a. Errors are intentional misstatements by d. In planning an audit, the auditor
management, while fraud involves considers the timing of certain planning
unintentional mistakes or omissions. activities and audit procedures that are
b. Errors are more likely to provide an to be completed prior to the performance
indication that an illegal act has of further audit procedures.
occurred.
c. Errors are unintentional mistakes or 50. The generally accepted auditing standards
omissions, while fraud involves of fieldwork pertain most directly to:
intentional misstatements. a. Improving internal control as a result of
d. There is no difference as errors and fraud the audit.
have the same meaning. b. Due professional care in the performance
of the audit.
47. Which of the following statements is correct c. The required training and proficiency of
relating to the auditor’s consideration of the auditors.
fraud? d. The planning of the audit.
a. The auditor’s interest in fraud
consideration relates to fraudulent 51. With respect to the auditor's planning of a
acts that cause a material year-end examination, which of the following
misstatement of financial statements is always true?
statements. a. An engagement should not be accepted
b. A primary factor that distinguishes fraud after the fiscal year-end.
from error is that fraud is always b. It is an acceptable practice to carry
intentional, while errors are generally, out substantial parts of the
but not always, intentional. examination at interim dates.
c. While an auditor should be aware of the c. An inventory count must be observed at
possibility of fraud, management, and the balance sheet date.
not the auditor, is responsible for d. The client's audit committee should not
detecting fraud. be told of the specific audit procedures
d. Fraud always involves a pressure or that will be performed.
incentive to commit fraud, and a
misappropriation of assets. 52. An initial (first-time) audit requires more
audit time to complete than a recurring
48. Which of the following factors or conditions audit. One of the reasons for this is that
is an auditor least likely to plan an audit to a. New auditors are usually assigned to an
discover? initial audit.
a. High turnover of senior management. b. A larger proportion of customer accounts
b. Inadequate monitoring of significant receivable need to be confirmed on an
controls. initial audit.
c. Inability to generate positive cash flows c. The client's business, industry, and
from operations. internal control are unfamiliar to the
d. Financial pressures affecting auditor and need to be carefully
employees. studied.
d. Predecessor auditors need to be
49. Which of the following statements consulted.
concerning audit planning is incorrect?
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53. Which of the following is not required by PSA actions by debiting an expense account,
No. 315, "Consideration of Fraud in a thus overstating expenses.
Financial Statement Audit"? b. Company management changes
a. Conduct a continuing assessment of the inventory count tags and overstates
risks of material misstatement due to ending inventory, while understating
fraud throughout the audit. cost of goods sold.
b. Conduct a discussion by the audit team c. An employee steals inventory and the
of the risks of material misstatement due “shrinkage” is recorded in cost of goods
to fraud. sold.
c. Conduct inquiries of the audit committee d. An employee steals small tools from the
as to their views about the risks of fraud company and neglects to return them;
and their knowledge of any fraud or the cost is reported as a miscellaneous
suspected fraud. operating expense.
d. Conduct the audit with professional
skepticism, which includes an 57. The type of transactions that ordinarily have
attitude that assumes balances are a high inherent risk because they involve
incorrect until verified by the management judgments or assumptions are
auditor. referred to as
a. Estimation transactions.
54. Inherent risk is defined as the susceptibility b. Nonroutine transactions.
of an account balance or class of c. Related-party transactions.
transactions to error that could be material d. Routine transactions.
assuming that there were no related internal
controls. Of the following conditions, which 58. Professional skepticism
one does not increase inherent risk? a. Assumes that management is either
a. The board of directors approved a dishonest or assumes unquestioned
substantial bonus for the president and honesty.
chief executive officer, and also approved b. Either assumes that management is
an attractive stock option plan for honest or dishonest.
themselves. c. Neither assumes that management
b. The client has entered into numerous is dishonest nor assumes
related party transactions during the unquestioned honesty.
year under audit. d. None of the above is a correct statement
c. Internal control over shipping,
billing, and recording of sales 59. Which of the following conditions identified
revenue is weak. during fieldwork of an audit is most likely to
d. The client has lost a major customer affect the auditor’s assessment of the risk of
accounting for approximately 30% of misstatement due to fraud?
annual revenue. a. Year-end adjusting journal entries.
b. Checks for significant amounts
55. Which of the following is true? outstanding at year-end.
a. Auditors are responsible for detecting all c. Missing documents.
fraudulent financial reporting. d. Computer generated documents.
b. Auditors must specifically consider fraud
risk from overstating liabilities. 60. Which of the following best describes what is
c. Auditors must specifically consider meant by the term “fraud risk factor?”
fraud risk from management a. Factors whose presence indicates that
override of controls. the risk of fraud is high.
d. All of the above are true b. Factors whose presence requires
modification of planned audit procedures.
56. Which of the following is an example of c. Factors whose presence often have
fraudulent financial reporting? been observed in circumstances
a. The treasurer diverts customer payments where frauds have occurred.
to his personal due, concealing his
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d. Reportable conditions identified during internal control procedures
an audit. a. That would aid in preventing fraud.
b. Documented in the flowchart.
61. Which of the following may cause c. Considered to be weaknesses that might
management to intentionally understate allow errors to enter the accounting
profits? system.
a. Management wants to create "cookie jar" d. Considered to be strengths for
reserves for a rainy day. which the auditor desires further
b. The company is under scrutiny by tax reduction in the assessed level of
authorities. control risk.
c. The company is suffering a large loss and
wants to take a "big bath." 65. When considering fraud risk factors relating
d. All of the above to management’s characteristics, which of
the following is least likely to indicate a risk
62. Which of the following characteristics most of possible misstatement due to fraud?
likely would heighten an auditor’s concern a. Failure to correct known reportable
about the risk of intentional manipulation of conditions on a timely basis.
financial statements? b. Use of unusually conservative
a. Turnover of senior accounting personnel accounting practices.
is low. c. Nonfinancial management’s
b. Insiders recently purchased additional preoccupation with the selection of
shares of the entity’s stock. accounting principles.
c. Management places substantial d. Significant portion of management’s
emphasis on meeting earnings compensation represented by bonuses
projections. based upon achieving unduly aggressive
d. The rate of change in the entity’s operating results.
industry is slow.
66. With respect to errors and fraud, the auditor
63. Which of the following statements reflects should plan to
an auditor’s responsibility for detecting a. Search for errors or fraud that would
misstatements due to errors and fraud? have a material effect on the financial
a. An auditor is responsible for detecting statements.
employee errors and simple fraud, but b. Discover errors or fraud that would
not for discovering fraud involving have a material effect on the
employee collusion or management financial statements.
override. c. Search for errors that would have a
b. An auditor should design the audit material effect and for fraud that would
to provide reasonable assurance of have either material or immaterial effects
detecting misstatements due to on the financial statements.
errors and fraud that are material to d. Search for fraud that would have a
the financial statements. material effect and for errors that would
c. An auditor should plan the audit to detect have either material or immaterial effects
misstatements due to errors and fraud on the financial statements.
that are caused by departures from
GAAP. 67. Auditor responsibility for identifying "direct
d. An auditor is not responsible for effect" illegal acts differs from their
detecting misstatements due to errors responsibility for detecting
and fraud unless the application of GAAS a. Errors.
would result in such detection. b. Indirect-effect illegal acts.
c. Fraud.
64. An auditor is required to obtain a basic d. Management fraud.
understanding of the client's internal control
to plan the audit. The auditor may then 68. Management’s attitude toward aggressive
decide to perform tests of controls on all financial reporting and its emphasis on
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meeting projected profit goals most likely with access to both assets and the
would significantly influence an entity’s accounting records.
control environment when
a. External policies established by parties 72. Which of the following relatively small
outside the entity affect its accounting misstatements most likely could have a
practices. material effect on an entity’s financial
b. Management is dominated by one statements?
individual who is also a shareholder. a. A piece of obsolete office equipment that
c. Internal auditors have direct access to was not retired.
the board of directors and the entity’s b. An illegal payment to a foreign
management. official that was not recorded.
d. The audit committee is active in c. A petty cash fund disbursement that was
overseeing the entity’s financial not properly authorized.
reporting policies. d. An uncollectible account receivable that
was not written off.
69. Which of the following is least likely to be
required on an audit? 73. Which of the following might be considered a
a. Review accounting estimates for biases. "red flag" indicating possible fraud in a large
b. Test appropriateness of journal entries manufacturing company with several
and adjustment. subsidiaries?
c. Make a legal determination of a. A consistent record of above average
whether fraud has occurred. return on investment for all subsidiaries
d. Evaluate the business rationale for b. The existence of a financial subsidiary
significant unusual transactions. c. Use of separate bank accounts for
payrolls by each subsidiary
70. Which of the following is most likely to be an d. Complex sales-transactions and
overall response to fraud risks identified in transfers of funds between affiliated
an audit? companies
a. Supervise members of the audit team
less closely and rely more upon 74. Warning signs that cause the auditor to
judgment. question management integrity must be
b. Only use certified public accountants on taken seriously and pursued vigorously.
the engagement. Which of the following may lead the auditor
c. Place increased emphasis on the audit of to suspect management dishonesty?
objective transactions rather than a. The client has been named as a
subjective transactions. defendant in a product liability suit.
d. Use less predictable audit b. The client has experienced a decrease in
procedures. revenue from increased import
competition.
71. The most likely explanation why the c. A new statutory regulation making
auditor’s examination cannot reasonably be customer licenses more difficult to obtain
expected to bring all illegal acts by the client may adversely affect the client's
to the auditor’s attention is that operations.
a. Illegal acts are perpetrated by d. The president and chief executive
management override of internal control. officer of the client corporation has
b. Illegal acts by clients often relate to held numerous meetings with the
operating aspects rather than controller for the purpose of
accounting aspects. discussing accounting practices that
c. The client’s internal control may be so will maximize reported profits.
strong that the auditor performs only
minimal substantive testing. 75. Which of the following methods may be used
d. Illegal acts may be perpetrated by the to commit fraudulent financial reporting?
only person in the client’s organization a. Understate liabilities
b. Fail to provide adequate disclosure
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c. Overstate revenues and all substantive tests to be performed
d. Each of the above can be used to in the course of the audit.
commit fraudulent financial b. Generic document that auditing firms
reporting have developed to lead the process of
the audit through a systematic and
76. The absence of which of the following logical process.
internal controls increases the opportunity c. Budget of the time that should be
for fraud? necessary to complete each phase of the
a. Appropriate segregation of duties or audit procedures.
independent checks d. Document that provides an overview
b. Job applicant screening for employees of the company and a general plan
with access to assets for the audit work to be
c. Mandatory vacations for employees with accomplished, timing of the work,
access to assets and other matters of concern to the
d. The absence of any of the above audit.
increases the opportunity for fraud
81. An audit program is
77. Whom should auditors contact when they a. A generic document that auditing firms
suspect a fraud? have developed to lead the process of
a. Senior management the audit through a systematic and
b. Expected perpetrators of the fraud logical process.
c. Audit committee of the board of directors b. An overview of the company and a
d. A and C general plan for the audit work to be
accomplished.
78. Auditors would normally interview all but c. The detailed plan of audit
which of the following individuals as part of procedures to be performed in the
their assessment of fraud risk? course of the audit.
a. Senior management d. A budget of the time that should be
b. Audit committee necessary to complete each phase of the
c. Various employees whose duties do not audit procedures.
include normal financial reporting
responsibilities 82. Which of the following concepts is most
d. All of the above useful in assessing the scope of an auditor's
program relating to various accounts?
79. After studying and evaluating a client's a. Attribute sampling
existing internal control, an auditor has b. Management fraud
concluded that the policies and procedures c. Materiality
are well-designed and functioning as d. The reliability of information
intended. Under these circumstances, the
auditor would most likely 83. One of the primary roles of an audit program
a. Perform further control tests to the is to
extent outlined in the audit program. a. Provide for a standardized approach to
b. Determine the control policies and the audit engagement.
procedures that should prevent or detect b. Serve as a tool for planning,
errors and fraud. directing, and controlling audit
c. Set detection risk at a higher level work.
than would be set under conditions c. Document an auditor's understanding of
of weak internal control. the internal control.
d. Set detection risk at a lower level than d. Delineate the audit risk accepted by the
would be set under conditions of weak auditor.
internal control.
84. The principal reason for developing a written
80. An audit plan is a audit program is to help assure that the
a. Detailed plan of analytical procedures a. Audit work is properly supervised.
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b. Audit report contains only significant sufficient basis for the auditor's opinion.
findings. d. Pending legal matters to be included in
c. Audit work is properly planned and the inquiry of the client's attorney.
documented.
d. Work of different auditors is properly 89. When a CPA expresses an opinion on the
coordinated. financial statements, his responsibilities
extend to
85. An auditor should design the written audit a. The underlying wisdom of the client's
program so that management decision.
a. All material transactions will be selected b. Active participation in the
for substantive testing. implementation of the advice given to
b. Substantive tests prior to the balance the client.
sheet date will be minimized. c. An ongoing responsibility for the client's
c. Each account balance will be tested solvency.
under either tests of controls or tests of d. Whether the results of the client's
transactions. operating decisions are fairly
d. The audit procedures selected will presented in the financial
achieve specific audit objectives. statements.
86. In the preparation of an audit program, 90. The accuracy of information included in the
which of the following items is not essential? footnotes that accompany the audited
a. Assessment of inherent risk financial statements of a company whose
b. The preparation of a budget shares are traded on a stock exchange is the
identifying the costs of resources primary responsibility of
needed a. The stock exchange officials.
c. A review of material from prior audits b. The company's management.
d. An understanding of controls established c. The independent auditor.
by management d. The Securities and Exchange
Commission.
87. Which of the following is not a consideration
in the development of audit programs? 91. The responsibility for adopting sound
a. Internal control over the recording of accounting policies, maintaining adequate
plant asset additions and repairs and internal control, and making fair
maintenance expenditures is found to be representations in the financial statements
weak. rests
b. The members of the board of a. With management
directors are elected by the b. With the independent auditor
stockholders during the annual c. Equally with management and the
meeting. auditor
c. The client is a private university located d. With the internal audit department.
in Southern Philippines.
d. The client constructed a major addition 92. Audit standards require an auditor to:
to its central manufacturing facility a. Perform procedures that are designed to
during the year under audit. detect all instances of fraud.
b. Provide reasonable assurance that
88. The element of the audit planning process the financial statements are not
most likely to be agreed upon with the client materially misstated.
before implementation of the audit strategy c. Issue an unqualified opinion only when
is the determination of the the auditor is satisfied that no instances
a. Procedures to be undertaken to discover of fraud have occurred.
litigation, claims, and assessments. d. Design the audit program to meet
b. Timing of inventory observation financial statement users' expectations
procedures to be performed. concerning fraud.
c. Evidence to be gathered to provide a
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93. Generally, the decision to notify parties financial statements are the
outside the client's organization regarding responsibility of the independent
an illegal act is the responsibility of the auditor.
a. Outside legal counsel. c. The term “materiality” refers to any
b. Independent auditor. factor of a size or type that would impact
c. Management. an outside decision-maker’s decision
d. Internal auditors. about a set of financial statements.
d. The role of the independent auditor is to
94. If requested to perform a review gain sufficient appropriate evidence so as
engagement for a nonpublic entity in which to provide reasonable assurance that
an accountant has an immaterial direct material misstatements do not exist in
financial interest, the accountant is any of the assertions made by
a. Independent because the financial management.
interest is immaterial and, therefore, may
issue a review report. 98. Which of the following activities is not
b. Not independent and, therefore, prohibited for the CPA firm's attestation
may not issue a review report. service clients?
c. Not independent and, therefore, may not a. Referral fees on audit jobs.
be associated with the financial b. Competitive bidding on audit jobs.
statements. c. Contingent fees on audit jobs.
d. Not independent and, therefore, may d. Commissions for obtaining client services
issue a review report, but may not issue on audit jobs.
an auditor's opinion.
99. Family and personal relationships between a
95. Solicitation consists of the various means member of the assurance team and a
that CPA firms use to engage new clients. director, an officer or certain employees,
Which one-of the following would not be an depending on their role, of the assurance
example of solicitation? client, least likely create
a. Advertisements in the yellow pages of a a. Self-review threat.
phone book. b. Self-interest threat.
b. Accepting new clients that approach c. Intimidation threat.
the firm. d. Familiarity threat.
c. Taking prospective clients to lunch.
d. Offering seminars on current tax law 100. The Code of Professional Ethics states, in
changes to potential clients. part, that a CPA should maintain integrity
and objectivity. Objectivity refers to the
96. Quality control procedures are applicable to CPA's ability to
the individual audit engagement. The a. Insist on all matters regarding audit
implementation of such quality control procedures.
procedures is responsibility of the: b. Determine the materiality of items.
a. CPA firm. c. Determine accounting practices that
b. Engagement team. were consistently applied.
c. Quality control reviewer. d. Maintain an impartial attitude on all
d. Manager assigned to the engagement. matters which come under his
review.
97. Which of the following statements is
incorrect?
a. In an audit, the independent auditor SET 6
attempts to corroborate assertions made
by the company’s management in 1. Conflict between financial statement users
connection with each account, class of and auditors often arises because of the
transactions, and disclosures found in a a. High cost of performing an audit.
set of financial statements. b. Expectation gap.
b. Because of the attest function,
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c. Technical vocabulary which the auditor member body or professional body
uses in the report. d. To respond to an inquiry or investigation
d. Placement of the auditor's report in the by a member body or regulatory body.
back of the client's annual report where it
is hard to locate. 7. Which of the following is not likely a threat
to independence?
2. Which of the following is best considered a a. Acting as an advocate on behalf of an
fraud? assurance client in litigation or in
a. Inability to provide due diligence. resolving disputes with third parties.
b. Intentional misrepresentation of b. Long association of a senior member of
financial information. the assurance team with the assurance
c. Declining to finish work on client in light client.
of a valid contract. c. Threat of replacement over a
d. Not acting professionally while disagreement with the application of an
performing services. accounting principle.
d. Owning immaterial indirect financial
3. Anyone identified to the auditor by name interest in an audit client.
prior to the audit who is to be the principal
recipient of the auditor's report is a
a. Primary beneficiary. 8. Examples of circumstances that may create
b. Third party. self-interest threat include:
c. Foreseen beneficiary. a. Contingent fees relating to assurance
d. Secondary beneficiary. engagements.
b. A direct financial interest or material
4. A director, an officer or an employee of the indirect financial interest in an assurance
assurance client in a position to exert direct client.
and significant influence over the subject c. A loan or guarantee to or from an
matter of the assurance engagement has assurance client or any of its directors or
been a member of the assurance team or officers.
partner of the firm. This situation least likely d. All of the above
create
a. Self-interest threat. 9. Examples of circumstances that may create
b. Advocacy threat. self-review threat least likely include
c. Intimidation threat. a. Potential employment with an
d. Familiarity threat. assurance client.
b. Preparation of original data used to
5. A former officer, director or employee of the generate financial statements or
assurance client serves as a member of the preparation of other records that are the
assurance team. This situation will least subject matter of the assurance
likely create engagement.
a. Self-interest threat. c. A member of the assurance team being,
b. Self-review threat. or having recently been, an employee of
c. Familiarity threat. the assurance client in a position to exert
d. Intimidation threat. direct and significant influence over the
subject matter of the assurance
6. A professional accountant has a professional engagement.
duty or right to disclose confidential d. Performing services for an assurance
information in each of the following, except: client that directly affect the subject
a. To disclose to BIR fraudulent scheme matter of the assurance engagement.
committed by the client on payment
of income tax. 10. A CPA-lawyer, acting as a legal counsel to
b. To comply with technical standards and one of his audit client, is an example of
ethics requirements. a. Advocacy threat
c. To comply with the quality review of a b. Familiarity threat
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c. Self-interest threat the assurance report is expressly
d. Self-review threat restricted for use by identified users.
d. All of the above
11. Examples of circumstances that may create
familiarity threat least likely include 14. Which of the following is incorrect regarding
a. A former partner of the firm being a independence?
director, officer of the assurance client or a. Independence consists of independence
an employee in a position to exert direct of mind and independence in
and significant influence over the subject appearance.
matter of the assurance engagement. b. Independence is a combination of
b. Dealing in, or being a promoter of, impartiality, intellectual honesty and
share or other securities in an a freedom from conflicts of interest.
assurance client. c. Independence of mind is the state of
c. A member of the assurance team having mind that permits the provision of an
an immediate family member or close opinion without being affected by
family member who is a director or influences that compromise professional
officer of the assurance client. judgment, allowing an individual to act
d. A member of the assurance team having with integrity, and exercise objectivity
an immediate family member or close and professional skepticism.
family member who, as an employee of d. Independence in appearance is the
the assurance client, is in a position to avoidance of facts and circumstances
exert direct and significant influence over that are so significant a reasonable and
the subject matter of the assurance informed third party, having knowledge
engagement. of all relevant information, including any
safeguards applied, would reasonably
12. The following are modifications made to the conclude a firm's or a member of the
IFAC Code to consider Philippine regulatory assurance team's integrity, objectivity or
requirements and circumstances, except professional skepticism had been
a. The period for rotation of the lead compromised.
engagement partner was changed
from five to seven years. 15. A CPA firm is considered independent when
b. Advertising and solicitation by individual it performs which of the following services
professional accountants in public for a publicly-traded audit client?
practice were not permitted in the a. Serving as a member of the client's
Philippines. board of directors.
c. Additional examples relating to b. Determining which accounting policies
anniversaries and websites will be adopted by the client.
wherein publicity is acceptable, as c. Accounting information system design
provided in boa resolution 19, series of and implementation.
2000, were included. d. Tax return preparation as approved
d. Payment and receipt of commissions by the board of directors.
were not permitted in the Philippines.
16. In connection with the examination of
financial statements, an independent auditor
13. The network firms are required to be could be responsible for failure to detect a
independent of the client material fraud if
a. For assurance engagements a. Statistical sampling techniques were not
provided to an audit client. used on the audit engagement.
b. For assurance engagements provided to b. The fraud was perpetrated by one client
clients that are not audit clients, when employee, who circumvented the
the report is not expressly restricted for existing internal control.
use by identified users. c. The auditor planned the work in a
c. For assurance engagements provided to hasty and inefficient manner.
clients that are not audit clients, when d. Accountants performing important parts
Page 59 of 100
of the work failed to discover a close 20. Individual CPAs, Firms or Partnerships of
relationship between the treasurer and CPAs, including partners and staff members
the cashier. thereof shall register with the BOA and the
PRC. Assuming that the application for
17. Which of the following conditions suggests registration of Sisip and Co., CPAs was
auditor negligence? approved on August 30, 2005, which of the
a. Failure to detect collusive fraud following is true?
perpetrated by members of middle a. The registration will expire on Dec.
management. 31, 2007.
b. Failure to detect collusive fraud b. The registration must be renewed on
perpetrated by members of top September 30, 2007.
management. c. The registration will expire on August 30,
c. Failure to detect errors occurring outside 2007 since the validity of the certificate
the internal control structure. of registration is three years.
d. Failure to detect material errors d. The registration will expire on Dec. 31,
under conditions of weak internal 2007 which is also the last day of
control. renewal of certificate of registration.
18. Which of the following statements is correct? 21. Auditor’s responsibility for detecting
a. Sufficiency refers to the quality of noncompliance is limited to those:
evidence, while appropriateness refers to a. Direct-effect noncompliance.
the quantity of evidence. b. Material direct-effect
b. The reliability of evidence is influenced noncompliance.
not by its nature but by its source. c. Material indirect-effect noncompliance.
c. The performance of consulting d. All noncompliance since they affect the
services for audit clients does not, in financial statements directly or indirectly.
and of itself, impair the auditor’s
independence. 22. Auditors would perform the following steps
d. A belief that management and those in which order?
charged with governance are honest and a. Determine audit risk; assess control risk;
have integrity relieves the auditor of the determine detection risk; set materiality.
need to maintain professional scepticism. b. Set materiality; assess control risk;
determine detection risk; determine audit
19. Which of the following statements is correct? risk.
a. The fair presentation of audited financial c. Set materiality; determine audit
statements in accordance with applicable risk; assess control risk; determine
financial reporting framework is an detection risk.
implicit part of the auditor’s d. Determine audit risk; set materiality;
responsibility. assess control risk; determine detection
b. Professional judgment can be used as the risk.
justification for the decisions made by
the auditor that are not otherwise 23. Which of the following statements is an not
supported by the facts and an example of an inherent limitation of
circumstances of the engagement or internal control?
sufficient appropriate evidence. a. The effectiveness of control
c. Appropriateness is the measure of the procedures depends on segregation
quality of evidence, that is, its reliability of duties.
and persuasiveness. b. Errors may arise from mistakes in
d. Most CPAs, including those who judgments.
provide audit and tax services, also c. Most internal controls tend to be directed
provide consulting services to their at routine transactions rather than non-
clients. routine transactions.
d. The cost-benefit relationship is a primary
criterion in designing internal control,
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29. Which statement is incorrect regarding
24. Compliance with the independence procedures and evidence obtained in a
requirement is necessary whenever a CPA review engagement?
performs: a. The auditor should apply judgment in
a. Non-assurance services determining the specific nature, timing
b. Professional services and extent of review procedures.
c. Tax consultancy services b. The auditor should apply the same
d. Assurance services materiality considerations as would be
applied if an audit opinion on the
25. It is acceptable for the auditor to prepare: financial statements were being given.
a. The financial statements for the client. c. There is a greater risk that
b. The notes to financial statements for the misstatements will not be detected
client. in an audit than in a review.
c. A draft of the financial statements for the d. The judgment as to what is material is
client. made by reference to the information on
d. A draft of the financial statements which the auditor is reporting and the
and notes to the financial needs of those relying on that
statements for the client. information, not to the level of assurance
provided.
26. When an accountant performs more than
one level of service, he generally should 30. Which of the following is not a document or
issue a report that is appropriate for: record that should be examined early in the
a. The lowest level of service rendered. engagement?
b. A compilation engagement. a. Corporate charter and by-laws.
c. The highest level of service b. Contracts.
rendered. c. Management letter.
d. A review engagement. d. Minutes of board of directors' and
stockholders' meetings.
27. An accountant who reviews the financial
statements should issue a report stating that 31. Philippine Standards on Auditing require
a review auditors to assess the risk of material
a. Is substantially less in scope than an misstatements due to fraud
audit. a. For first-time audits.
b. Provides negative assurance that the b. Sufficient to find any frauds which may
internal control is functioning as exist.
designed. c. For every audit.
c. Provides only a limited assurance that d. Whenever it would be appropriate.
the financial statements are fairly
presented. 32. In connection with the examination of
d. Is substantially more in scope than a financial statements, an independent auditor
compilation could be responsible for failure to detect a
material fraud if
28. Which of the following is required to be a. Accountants performing important parts
performed in an audit but not in review of the work failed to discover a close
engagement? relationship between the treasurer and
a. Complying with the "Code of Professional the cashier.
Ethics for Certified Public Accountants" b. The auditor planned the work in a
promulgated by the Board of hasty and inefficient manner.
Accountancy c. Statistical sampling techniques were not
b. Planning the engagement used on the audit engagement.
c. Agreeing on the terms of engagement d. The fraud was perpetrated by one client
d. Studying and evaluating internal employee, who circumvented the
control structure existing internal control.

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33. Which of the following is not true regarding than its substance.
planning in an electronic environment?
a. The definition of auditing is not changed 37. Auditors focus on
b. The purposes of auditing is not changed a. Areas where the risk of material errors
c. The procedures used are not and irregularities is least.
changed b. Areas where the risk of material
d. Auditing standards are not changed errors and irregularities is greatest.
c. All areas equally.
34. Which of the following concepts of d. A random selection of all areas.
materiality is incorrect?
a. Materiality is based on quantitative and 38. Audit risk components consist of inherent,
non-quantitative factors. control and detection risks. Which of them is
b. Materiality is a matter of professional are dependent variable(s)?
audit judgment. a. Inherent risk
c. Materiality does not apply if internal b. Control risk
control is highly effective. c. Detection risk
d. Materiality is more closely related to the d. Inherent and control risks
fieldwork and reporting standards than to
general standards. 39. The risk that the audit will fail to uncover a
material misstatement is eliminated
35. Which of the following statements is a. When the auditor has complied with
incorrect about materiality? generally accepted auditing standards.
a. The concept of materiality recognizes b. If a client has strong internal controls.
that some matters are important for fair c. If a client follows generally accepted
presentation of financial statements in accounting principles.
conformity with GAAP, while other d. Under no circumstances.
matters are not important.
b. An auditor considers materiality for 40. The probability of an auditor's procedures
planning purposes in terms of the leading to the conclusion that a material
largest aggregate level of error does not exist in an account balance
misstatements that could be when, in fact, such error does exist is
material to any one of the financial referred to as
statements. a. Prevention risk.
c. Materiality judgments are made in light b. Inherent risk.
of surrounding circumstances and c. Control risk.
necessarily involve both quantitative and d. Detection risk.
qualitative judgments.
d. An auditor’s consideration of materiality 41. Which of the following does an auditor least
is influenced by the auditor’s perception likely perform in assessing audit risk?
of the needs of a reasonable person who a. Understand the economic substance of
will rely on the financial statements. significant transactions completed by the
client.
36. After discovering that a related-party b. Understand the entity and the industry in
transaction exists, the auditor should be which it operates.
aware that the c. Gather audit evidence in support of
a. Transaction is assumed to be outside the recorded transactions.
ordinary course of business. d. Obtain an understanding of the client's
b. Substance of the transaction could system of internal control.
be significantly different from its
form. 42. Which of the following is most likely to be an
c. Adequacy of disclosure of the transaction overall response to fraud risks identified in
is secondary to its legal form. an audit?
d. Financial statements should recognize a. Supervise members of the audit team
the legal form of the transaction rather less closely and rely more upon
Page 62 of 100
judgment. b. Negative cash flows from
b. Use less predictable audit operations.
procedures. c. Large amounts of cash processed.
c. Use only certified public accountants on d. Small high-dollar inventory items.
the engagement.
d. Place increased emphasis on the audit of 48. When planning the audit, if the auditor has
objective transactions rather than no reason to believe that illegal acts exist,
subjective transactions. the auditor should
a. Make inquiries of management
43. If the auditor is convinced that the client has regarding their policies and their
an excellent internal control structure, the knowledge of violations, and then
amount of audit evidence to be gathered. rely on normal audit procedures to
a. Can be significantly less than where detect errors, irregularities, and
internal control is not adequate. illegalities.
b. Will not be affected since the auditor b. Still include some audit procedures
must arrive at an independently designed specifically to uncover
determined opinion. illegalities.
c. Must be increased to support the c. Ignore the topic.
auditor's belief. d. Include audit procedures which have a
d. Is not determinable. strong probability of detecting illegal
acts.
44. Why should the auditor plan more work on
individual accounts as lower acceptable 49. Which statement best describes the
levels of both audit risk and materiality are emphasis of the systems and substantive
established? approaches in the audit plan?
a. To find smaller errors a. A thoroughly designed systems approach
b. To find larger errors to auditing can eliminate the need for
c. To increase the tolerable error in the any substantive procedures.
accounts b. The systems approach focuses on
d. To decrease the risk of overreliance detailed testing of specific accounts for
accuracy, while the substantive approach
45. Which of the following most accurately is the testing controls to make sure they
summarizes what is meant by the term are effective.
“material misstatement?” c. The systems approach focuses on
a. Fraud and direct-effect illegal acts. testing controls to make sure they
b. Fraud involving senior management and are effective, while the substantive
material fraud. approach is the detailed testing of
c. Material error, material fraud, and specific accounts for accuracy.
certain illegal acts. d. The systems approach focuses on the
d. Material error and material illegal acts. use of computer systems to aid in the
audit while the substantive approach
46. The risk of fraudulent financial reporting focuses on more manual tests.
increases in the presence of
a. Substantial increases in sales. 50. Audit programs should be designed so that
b. Incentive systems based on a. Most of the required procedures can be
operating income. performed as interim work.
c. Improved control systems. b. The audit evidence gathered
d. Frequent changes in suppliers. supports the auditor’s conclusions.
c. Inherent risk is assessed at a sufficiently
47. Which of the following is most likely to be low level.
considered a risk factor relating to d. The auditor can make constructive
fraudulent financial reporting? suggestions to management.
a. Domination of management by top
executives.
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51. The decision as to how much evidence to be d. Search for unrecorded liabilities has been
accumulated for a given set of performed and documented.
circumstances is:
a. Provided in the Philippines Standards on 57. A person or firm possessing special skill,
Auditing. knowledge and experience in a particular
b. Provided by following GAAP field excluding accounting and auditing.
c. One requiring professional judgment a. Quality control reviewer
d. Determined by statistical analysis b. Multiskilled personnel
c. Expert
52. The revised Code of Ethics is mandatory for d. Taxation specialist
all CPAs and is applicable to professional
services performed in the Philippines on or: 58. The Code of Ethics for Professional
a. Before June 30. 2008 Accountants in the Philippines is applicable
b. After June 30, 2008 to professional services in the Philippines on
c. Before January 1,2008 or before:
d. After January 1, 2008 a. December 31, 2009
b. July 1, 2004
53. Which of the following is not explicitly c. June 30, 2008
referred to in the Code of Ethics as source of d. June 30, 2009
technical standards?
a. Commission on Audit (COA) 59. Which part of the Code of Ethics applies to
b. Auditing and Assurance Standards professional accountants in public practice?
Council (AASC) a. Part A
c. Securities and Exchange Commission b. Part B
(SEC) c. Part A and Part B
d. Relevant legislation d. Part C
54. In designing written audit programs, an 60. This fundamental ethical principle prohibits
auditor should establish specific audit association of professional accountants with
objectives that relate primarily to the reports, returns, communications and other
a. Financial statement assertions. information that contains materially false or
b. Timing of audit procedures. misleading information or statements.
c. Cost-benefit of gathering evidence. a. Integrity
d. Selected audit techniques. b. Objectivity
c. Professional competence and due care
55. An audit program provides proof that d. Professional behavior
a. Sufficient appropriate evidence was
obtained. 61. The principle professional competence and
b. The work was adequately planned. due care imposes which of the following
c. There was a proper study and evaluation obligations on professional accountants?
of internal control. a. To maintain professional knowledge
d. There was compliance with generally and skill at the level required to
accepted standards of reporting. ensure that a client or employer
receives competent professional
56. The audit program usually cannot be service.
finalized until the b. To comply with relevant laws and
a. Reportable conditions have been regulations and avoid any action that
communicated to the audit committee of discredits the profession.
the board of directors. c. Not to override or compromise his
b. Engagement letter has been signed by professional or business judgment
the auditor and the client. because of bias, conflict of interest or
c. Consideration of the entity’s internal undue influence of others.
control has been completed. d. To be fair and truthful.

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62. Attainment of professional competence 67. The audit should not assume that
requires the following, except: management is dishonest, but the possibility
a. Initially, a high standard of education. of dishonesty must be considered." This is
b. Specific education, training, and an example of
examination in professionally relevant a. Due diligence.
subjects. b. Unprofessional behavior.
c. Whether prescribed or not, a period of c. An attitude of professional
work experience. skepticism.
d. A continuing awareness and an d. An ethical requirement.
understanding of relevant technical
professional and business 68. In discovering material management fraud
developments. and an equally material error, the audit plan
a. Cannot be expected to provide the same
63. A draft of statement, studies or standards degree of assurance.
should be discussed by the Council en banc. b. Provide no assurance of detecting either.
How many members of the AASC are c. Should be expected to provide the
required to approve the draft for exposure? same degree of assurance.
a. Eight d. Should provide complete assurance of
b. Ten detection.
c. Twelve
d. Majority 69. In comparing management fraud with
employee fraud, the auditor's risk of failing
64. How many members of the AASC are needed to discover the fraud is
to approved the exposed draft as PSA a. Greater for employee fraud because of
a. At least 8 the larger number of employees in the
b. At least 10 organization.
c. At least 12 b. Greater for employee fraud because of
d. Majority of the regular members the higher crime rate among blue collar
workers.
65. An auditor's examination performed in c. Greater for management fraud
accordance with generally accepted auditing because of management's ability to
standards generally should override existing internal controls.
a. Be expected to provide assurance that d. Greater for management fraud because
illegal acts will be detected where managers are inherently smarter than
internal control is effective. employees.
b. Be relied upon to disclose violations of
truth-in-lending act. 70. The risk that the audit will fail to uncover a
c. Encompass a plan to search actively for material misstatement is eliminated
illegalities which relate to operating a. When the auditor has complied with
aspects. generally accepted auditing standards.
d. Not be relied upon to provide b. If client has good internal control.
assurance that illegal acts will be c. If client follows generally accepted
detected. accounting principles.
d. Under no circumstances.
66. Which of the following statements is true?
a. It is usually equally difficult for the 71. The practitioner’s report on an assurance
auditor to uncover errors or irregularities. engagement should always include the
b. It is usually easier for the auditor to following, except
uncover irregularities than errors. a. A description of the engagement and
c. It is usually easier for the auditor to identification of the subject matter
uncover errors than irregularities. b. Identification of the standards under
d. Usually, none of the above statements is which the engagements was conducted.
true. c. Identification of the criteria.
d. Reference to the work of an expert.
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b. An entity that controls a partnership of
72. Which of the following is required if the professional accountants.
professional accountant uses experts who c. An entity controlled by a partnership of
are not professional accountants? professional accountants.
a. The professional accountant is d. A sole practitioner, partnership or
discouraged to engage the services of corporation of professional
experts who are not a professional accountants.
accountant.
b. The ultimate responsibility for the 76. The term professional accountant in public
professional service is assumed by the practice includes the following, except:
expert who is not a professional a. A sole proprietor providing professional
accountant. services to a client.
c. The professional accountant must b. Each partner or person occupying a
take steps to see that such experts position similar to that of a partner staff
are aware of the ethical in a practice providing professional
requirements of the profession. services to a client.
d. Experts who are not professional c. Professional accountants employed
accountants need not be informed of in the public sector having
ethical requirements because they are managerial responsibilities.
not members of the Accountancy d. A firm of professional accountants in
profession. public practice.
73. Which of the following is expected of AASC 77. The term receiving accountant includes the
to do? following, except;
a. AASC should normally expose its opinion a. A professional accountant in public
on specific queries from a practicing CPA. practice to whom existing accountant has
b. AASC should normally expose a proposed referred tax engagement.
interpretation of statements. b. A professional accountant in public
c. To make the statements on practice to whom the client of the
Philippine Standards on Auditing existing accountant has referred audit
operative, the final statement shall engagement.
be submitted to the Board of c. A professional accountant in public
Accountancy for approval. practice who is consulted in order to
d. When it is deemed necessary to expose a meet the needs of the client.
statement for a comment on proposed d. A professional accountant in public
interpretations of statements, the practice currently holding an audit
exposure period is understandably appointment or carrying out
shorter than those of the regular drafts of accounting, taxation, consulting or
standards. similar professional services for a
client.
74. Required auditor communication to the Audit
Committee concerning noncompliance with 78. A primary purpose for establishing a code of
laws and regulations that were detected ethics within a professional organization is
includes: to:
a. All those which are not adequately a. Demonstrate the acceptance of
addressed by management. responsibility Jo the interest of
b. All those that constitute management those served by the profession.
fraud. b. Reduce the likelihood that members of
c. All material items. the profession will be sued for
d. Any of such acts. substandard work.
c. Ensure that all members of the
75. Firm includes the following except: profession posses approximately the
a. A sole practicing professional accountant, same level of competency.

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d. Require members of the profession to 83. Which one of the following is not a key
exhibit loyalty in all matters pertaining to attribute that is essential to perform an
the affairs of the organization. assurance service?
a. Independence
79. The communication to the public of facts b. Accounting skills
about a professional accountant which are c. Established criteria or standards
not designed for the deliberate promotion of d. Subject matter knowledge
that professional accountant.
a. Publicity 84. Upon completion of a typical audit, the
b. Indirect promotion auditor has
c. Advertising a. No assurance that all material errors and
d. Solicitation fraud have been found.
b. A low level of assurance that all material
80. Advertising, as defined in the Code of Ethics, errors and fraud have been found.
means c. High level of assurance that all
a. The communication to the public of facts material errors and fraud have been
about a professional accountant which found.
are not designed for the deliberate d. Total assurance that al material errors
promotion of that professional and fraud have been found.
accountant.
b. The approach to a potential client for the 85. An investor, while reading the financial
purpose of offering professional services. statements of Star Corporation, learned that
c. The communication to the public of the statements are accompanied by an
information as to the services or unqualified auditor's report. From this the
skills provided by professional investor may conclude that:
accountants in public practice with a a. The auditor has ascertained that Silver's
view to procuring professional financial statements have been prepared
business. accurately.
d. Any of the given choices. b. The auditor is satisfied that Silver is
operationally efficient.
81. Which of the following is least likely the c. Any disputes over significant
basis of determining audit fees? accounting issues have been settled
a. The skill and knowledge required for the to the auditor's satisfaction.
type of work involved. d. Informative disclosures in the financial
b. The degree of responsibility and urgency statements but not necessarily in the
that the work entails. notes to financial statements are to be
c. The expected outcome of the regarded as reasonably adequate.
engagement.
d. The required level of training and 86. A CPA should maintain objectivity and be
experience of the person engaged on the free of conflicts of interest when performing:
work. a. All attestation services, but not other
professional services.
82. Though PSAs do not provide "hard and fast b. All attestation and tax services, but not
rules," they provide subjective guidance other professional services.
which allow the auditors to: c. Audits, but not any other professional
a. Only apply those standards that are services.
important to the audit. d. All professional services.
b. Use adequate professional judgment
when applying the standards. 87. Which of the following has primary
c. Tailor their audit to procedures requested responsibility for the performance of an
by management. audit?
d. Accurately interpret the Code of Ethics a. The partner in charge of the
for CPAs. engagement
b. The senior assigned to the engagement
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c. The managing partner of the firm
d. The manager assigned to the 93. In all cases, audit reports must
engagement a. Communicate the auditor’s finding to the
general public.
88. The most common type of audit report b. Be signed by the individual who
contains a(n): performed the audit procedures.
a. Unqualified opinion. c. Certify the accuracy of the quantitative
b. Qualified opinion. information which was audited.
c. Adverse opinion. d. Inform readers of the degree of
d. Disclaimer of opinion. correspondence between the
quantifiable information and the
89. Assurance services involve all the following established criteria.
except:
a. Improving the quality of information for 94. The framework for auditing and related
decision purposes. services as addressed by PSA excludes
b. Improving the quality of the decision a. Review
model used. b. Compilation
c. Improving the relevance of information. c. Tax services
d. Implementing a system that d. Agreed upon procedure
improves the processing of
information. 95. It refers to the level of auditor’s satisfaction
as to the reliability of an assertion being
90. Which of the following is the broadest and made by one party for use by another party.
most inclusive concept? a. Confidence level
a. Audits of financial statements. b. Assurance level
b. Internal control audit. c. Reasonableness level
c. Assurance services. d. Tolerable level
d. Compilation services.
96. Which of the following is true of the report
91. Whenever a CPA professional is engaged to based on agreed-upon-procedures?
perform an audit of financial statements a. The report is restricted to those
according to Philippine Standards on parties who have agreed to the
Auditing, he required to comply with those procedures to be performed.
standards in order to b. The CPA provides the recipients of the
a. Eliminate audit risk. report limited assurance as to
b. Eliminate the professional judgment in reasonableness of the assertion(s)
resolving audit issues. presented in the financial information.
c. Have a measure of the quality of c. The report states that the auditor has not
audit performance. recognized any basis that requires
d. To reduce the audit program to be revision of financial statements.
prepared by the auditor. d. The report should state that the
procedures performed are limited to
92. Certain fundamental beliefs called analytical procedures and inquiry.
"postulates" underlie auditing theory. Which
of the following is not a postulate of 97. The three types of attestation services are:
auditing? a. Audits, review, and compilations
a. Economic assertions can be verified. b. Reviews, compilations, and other
b. The auditor acts exclusively as an attestation services
auditor. c. Audits, compilations, and other
c. An audit has a benefit only to the attestation services
owners. d. Audits, reviews, and other
d. No long-term conflict exists between the attestation services
auditor and the management of the
entity under audit.
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98. Which of the following types of audit uses as economic events that occurred
its criteria laws and regulations? during the accounting period.
a. Financial statement audit d. Determining if taxable income has been
b. Operational audit calculated correctly.
c. Compliance audit
d. Financial audit 2. Which one of the following is an example of
management expectations from the
99. Which of the following least likely limits the independent auditors?
auditor’s ability to detect material a. An expert providing a written
misstatement? communication as the product of the
a. The inherent limitations of any engagement.
accounting and internal control system. b. Individuals who perform day-to-day
b. Most audit evidences are conclusive accounting functions on behalf of the
rather than being persuasive. company.
c. Audit is based on testing C. AN active participant in management
d. Audit procedures that are effective in decision-making.
detecting ordinary misstatements are d. An internal source of expertise on
ineffective in detecting intentional financial and other matters.
misstatements.
3. Broadly defined, the subject matter of any
100. Examples of circumstances that may audit consists of
create familiarity threat least likely include a. Financial statements.
a. A member of the assurance team having b. Assertions.
an immediate family member or close c. Operating data.
family member who is a director or d. Economic data.
officer of the assurance client.
b. A member of the assurance team having 4. An engagement in which a CPA firm arranges
an immediate family member or close for a critical review of its practices by
family member who, as an employee of another CPA firm.
the assurance client, is in a position to a. Attestation engagement
exert direct and significant influence over b. Peer review engagement
the subject matter of the assurance c. Quality control engagement
engagement. d. Quality assurance engagement
c. A former partner of the firm being a
director, officer of the assurance client or 5. The risk associated with a company's
an employee in a position to exert direct survival and profitability is referred to as:
and significant influence over the a. Information risk
subject matter of the assurance b. Business risk
engagement. c. Control risk
d. Dealing in, or being a promoter of, d. Detection risk
share or other securities in an
assurance client. 6. An operational audit differs in many ways
from an audit of financial statements. Which
SET 7 of the following is the best example of these
differences?
1. In "auditing" accounting data, the auditor is a. Operation audits do not ordinarily result
concerned with in the preparation of a report.
a. Analyzing the financial information to be b. The usual audit of financial statement
sure that it complied with government covers the four basic financial
requirement. statements whereas the operational
b. Determining if fraud has occurred. audit is usually limited either the balance
c. Determining whether recorded sheet or the income statement.
information properly reflects the c. The boundaries of an operation
audit are often drawn from an
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organization chart and are not d. Establish new criteria by which financial
limited to a single accounting statements may be compared.
period.
d. The operational audit deals with 11. Which one of the following is not a part of
operating profit while financial audit the attest process?
considers both the operating and net a. Evaluating evidence against objective
profits. criteria
b. Gathering evidence about assertions
7. The audit of historical financial statements c. Proving the accuracy of the books
should be conducted by the CPA and records
professionals in accordance with d. Communicating the conclusions reached
a. The auditor's judgment.
b. The audit program. 12. Which one of the following is not a reason
c. Philippine Financial Reporting Standards. why the users of financial statements desire
d. Philippine Standards on Auditing. for an independent assessment of the
financial statement presentation?
8. In determining the primary responsibility of a. Complexity of transactions affecting the
the external auditor for an audit of a financial statements
company's financial statements, the auditor b. Lack of criteria on which to base
owes primary allegiance to: information
a. The management of the audit client c. Remoteness of the user from the
because the auditor is hired and paid by organization
management. d. All of them are potential reasons
b. The audit committee of the audit client
because that committee is responsible 13. An audit which determines whether
for coordinating and reviewing all audit organizational policies are being followed
activities within the company. and whether external mandates are being
c. Stockholders, creditors, and the met is referred to as
investing public. a. A financial audit
d. The Auditing and Assurance Standards b. A compliance audit.
Council, because it determines auditing c. An operational audit.
standards and auditor's responsibility. d. None of the above
9. Assurance services may include which of the 14. Which of the following factors most likely
following? would cause a CPA to decline a new audit
a. Attesting to financial statements engagement?
b. Examination of the economy and a. The CPA does not understand the entity's
efficiency of governmental operations operations and industry.
c. Evaluation of a division's performance for b. The CPA is unable to review the
management predecessor auditor's working papers.
d. All of the given choices c. Management is unwilling to permit
inquiry of its legal counsel.
10. The auditor of financial statements must d. Management acknowledges that the
make very difficult interpretations regarding entity has had recurring operating losses.
authoritative literature. Additionally, the
auditor must 15. Auditing standards are
a. Proceed beyond PFRS to assess how a. Statutory in nature.
the economic activity is portrayed in b. Rules imposed by the Securities and
the financial statements. Exchange Commission.
b. Force management to make certain c. General guidelines to help auditors.
decisions regarding their financial d. Rules imposed by the PICPA.
statements.
c. Disregard independence in order to find
the underlying truth of the evidence.
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16. Which of the following best describes what is for an audit client.
meant by generally accepted auditing
standards? 21. Practitioner's independence:
a. Pronouncements issued by the Auditing a. Minimizes risk.
and Assurance Standards Council. b. Defends against liability
b. Rules acknowledged by the accounting c. Helps achieve public confidence
profession because of their universal d. Achieves compliance with the standards
compliance. of fieldwork.
c. Procedures to be used to gather evidence
to support financial statements. 22. The exercise of due professional care
d. Measures of the quality of the requires that an auditor
auditor's performance. a. Uses error-free judgment.
b. Considers internal control, including tests
17. Generally Accepted Auditing Standards of controls.
(GAAS) and Philippine Standards on Auditing c. Examines all corroborating evidence
(PSA) should be looked upon by practitioners available.
as d. Be responsible for fulfilling his or
a. Ideals to work towards, but which are not her duties diligently and carefully.
achievable.
b. Benchmarks to be used on all audits, 23. The exercise of due professional care
reviews, and compilations. requires that an auditor
c. Maximum standards which denote a. Critically review the judgment
excellent work. exercised at every level of
d. Minimum standards of performance supervision.
which must be achieved on each b. Attain the proper balance of professional
audit engagement. experience and formal education.
c. Reduce control risk below the maximum.
18. Competence as a certified public accountant d. Examine all available corroborating
includes all of the following except evidence.
a. Consulting others if additional technical
information is needed. 24. The exercise of due professional care
b. Possessing the ability to supervise and requires that an auditor
evaluate the quality of staff work. a. Use error-free judgment.
c. Having the technical qualifications to b. Consider internal control, including tests
perform an engagement. of controls.
d. Warranting the infallibility of the c. Critically review the work done at
work performed. every level of supervision.
d. Examine all corroborating evidence
19. Which one of the following attributes is available.
required of an auditor in relation to audit
clients? 25. An auditor who accepts an audit
a. Loyalty engagement and does not possess the
b. Rationalization industry expertise of the business entity,
c. Independence should
d. Bias a. Engage financial experts familiar with the
nature of the business entity.
20. To be independent, the auditor: b. Obtain a knowledge of matters that
a. Must be impartial when dealing with relates to the nature of the entity's
the client. business.
b. Cannot place any reliance on the client's c. Refer a substantial portion of the audit to
verbal and written assertions. another CPA who will act as the principal
c. Is responsible only to third-party users of auditor.
the financial statements. d. First inform management that an
d. Cannot perform any consulting services unqualified opinion cannot be issued.
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Professional Accountants, that are
26. Which of the following underlies the intended to limit the degree of auditor
application of generally accepted auditing judgment.
standards, particularly the standards of b. They are procedural outlines which are
fieldwork and reporting? intended to narrow the areas of
a. Element of corroborating evidence inconsistency and divergence of auditor
b. Element of reasonable assurance opinion.
c. Elements of materiality and risk c. They are guides intended to set forth
d. Element of internal control auditing procedures that are applicable
to a variety of situations.
27. Which of the following is the authoritative d. They are interpretations which are
body designated to promulgate auditing intended to clarify the meaning of
standards? "generally accepted auditing
a. Financial Reporting Standards Council standards."
b. PICPA
c. Association of CPAs in Public Practice and 31. In financial statement audits, the audit
PICPA process should be conducted in accordance
d. Auditing and Assurance Standards with
Council a. Philippine Financial Reporting Standards
b. International Accounting Standards
28. Which of the following mostly describes the c. Philippine Standards on Auditing
function of AASC? d. Philippine Accounting Standards
a. To monitor full compliance by auditors to
PSAs. 32. The Philippine Standards on Auditing issued
b. To assist the Board of Accountancy in by AASC
conducting administrative proceedings a. Need to be applied on all audit related.
on erring CPAs in audit practice. b. Require that in no circumstances would
c. To promulgate auditing standards, an auditor may judge it necessary to
practices and procedures that shall depart from a PSA, even though such a
be generally accepted by the departure may result to more effective
accounting profession in the achievement of the objective of an audit.
Philippines. c. Apply to independent examination
d. To undertake continuing research on both of financial statements of any entity
auditing and financial accounting in order when such an examination is
to make them responsive to the needs of conducted for the purpose of
the public. expressing an opinion.
d. Must not apply to other related activities
29. The Philippine Standards on Auditing issued of auditors.
by the Auditing and Assurance Standards
Council (AASC) 33. An auditor needs not abide by a Philippines
a. Are interpretations of generally Standard on Auditing if the auditor believes
accepted auditing standards that
b. Are the equivalent of laws for audit a. The amount is insignificant.
practitioners. b. The requirement of the PSA is impractical
c. Must be followed in all situations. to perform.
d. Are optional guidelines which an auditor c. The requirement of the PSA is impossible
may choose to follow or not follow when to perform.
conducting an audit. d. Any of the above three is correct.
30. Which of the following statements best 34. Auditing standards differ from auditing
describes the primary purpose of Philippines procedures in that procedures relate to:
Standards on Auditing? a. Measures of performance
a. They are authoritative statements, b. Acts to be performed.
enforced through the Code of Ethics for c. Audit judgments.
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d. Audit principles. 38. Which of the following is not allowed to be
included in a website of a firm of
35. Every independent audit engagement professional accountants?
involves both auditing standards and a. Names of partners/principals with their
auditing procedures. The relationship educational attainment.
between the two may be illustrated by how b. Membership in any professional body.
they apply from engagement to c. Awards received
engagement. The best representation of d. Listings of the firm's clients.
this application is that, from one audit
engagement to the next, 39. In their fiduciary role, the professional
a. Auditing standards are applied accountants owe their primary loyalty to:
uniformly but auditing procedures a. The accounting profession
may vary. b. The general public
b. Auditing standards may vary but auditing c. The client
procedures are applied uniformly. d. Government regulatory agencies
c. Auditing standards are applied uniformly
but auditing procedures are optional. 40. Which of the following is a distinguishing
d. Both auditing standards and auditing mark of the accountancy profession?
procedures are applied uniformly. a. A drive to excellence
b. Acceptance of the responsibility to
36. Generally accepted accounting principles act in the public interest
(GAAP) are distinguished from generally c. Professional objectivity
accepted auditing standards (GAAS) in that: d. Professional skepticism
a. GAAP are the principles auditors follow
when conducting an audit, while GAAS 41. A professional accountant is likened to a
are the standards for presentation of prudent father to his son. This relates to
financial statements and underlying what fundamental principle?
transactions. a. Professional competence and due
b. GAAP are the principles for care
presentation of financial statements b. Confidentiality
and underlying transactions, while c. Integrity
GAAS are the standards that the d. Objectivity
auditors should follow when
conducting an audit. 42. Which fundamental principle is seriously
c. When GAAP are violated, sufficiently threatened by an engagement that is
strong GAAS may make up for most compensated based on the net proceeds on
GAAP deficiencies. loans received by the client from a
d. GAAP are promulgated by the SEC, while commercial bank?
GAAS are promulgated by the PFRC. a. Integrity
b. Objectivity
37. How frequent can a professional accountants c. Professional behavior
have press and other media releases d. Confidentiality
commemorating their anniversaries in public
practice by informing the public of their 43. Which of the following values is not
achievements or accomplishments in necessary for a professional accountant?
contributing toward nation building or a. Honesty
enhancing the image or standards of the b. Objectivity
accounting profession? c. Integrity
a. 2 years d. A primary commitment to self-
b. 3 years interest
c. 5 years
d. 6 years 44. Professional accountants may encounter
problems in identifying unethical behavior or
in resolving an ethical conflict. When faced
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with significant ethical issues, professional d. Professional accountants should
accountants should do the following, except neither accept nor offer any gifts or
a. Follow the established policies of the entertainment.
employing organization to seek a
resolution of such conflict 47. If a professional accountant is billing an
b. Review the conflict problem with the audit client a number of hours greater than
immediate superior if the organization's those actually worked, which of the following
policies do not resolve the ethical fundamental principles is likely violated?
conflict. a. Objectivity
c. If the problem is not resolved with b. Integrity
the immediate superior and the c. Professional due care
professional accountant determines d. Confidentiality
to go to the next higher managerial
level, the immediate superior need 48. Which of the following is not a function of
not be notified of the decision. the Board of Accountancy as specified in the
d. Seek counseling and advice on a Philippine Accountancy Act of 2004?
confidential basis with an independent a. To investigate violations of the
advisor or the applicable professional Accountancy Law and the rules and
accountancy body or regulatory body to regulations promulgated therewith.
obtain an understanding of possible b. To look from time to time into the
courses of action. conditions affecting the practice of the
accountancy profession.
45. As a resolution of the conflict in the c. To create and direct accrediting
application of fundamental principles, the agencies that are entrusted the
auditor, after considering the ethical issues functions of reviewing higher
and relevant facts may do any of the educational institutions' policies and
following, except: practices leading to
a. Must immediately resign from the accreditation/reaccreditation of BSA
engagement or the employing program.
entity. d. To determine and prescribe minimum
b. Should weigh me consequences of each requirements leading to the admission of
possible course of action. candidates to the CPA licensure
c. Should consult with other appropriate examination.
persons within the firm or employing
organization for help to finally resolve the 49. All of the following are represented to the
matter. Financial Reporting Standards Council,
d. The professional accountant may wish to except:
obtain professional advice from, the a. Securities and Exchange Commission
relevant professional body without b. Bureau of Internal Revenue
breaching confidentiality if significant c. Commission on Higher Education
conflict cannot be resolved. d. Board of Accountancy
46. Which of the following is incorrect regarding

integrity and objectivity? 50. A CPA whose certificate of registration has
a. Integrity implies not merely honesty but been revoked:
fair dealing and truthfulness. a. Can no longer be reinstated.
b. The principle of objectivity imposes the b. Is automatically reinstated as a CPA by
obligation on all professional accountants the PRC after two years if he has acted in
to be fair, intellectually honest and free an exemplary manner.
of conflicts of interest. c. May be reinstated by the Professional
c. Professional accountants serve in many Regulation Commission after two years if
different capacities and should he has acted in an exemplary manner.
demonstrate their objectivity in varying d. May be reinstated as a CPA by the
circumstances. Board of Accountancy after two
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years if he has acted in an a. Remind management of its primary
exemplary manner. responsibility over the financial
statements.
51. The Philippine Accountancy Act of 2004 b. Satisfy the requirements of the Code of
provides that all Working papers made Professional Conduct for CPAs.
during an audit shall be the property of the c. Provide a starting point for the auditor's
auditor. These working papers shall include preparation of the preliminary audit
the following, except: program.
a. Working papers prepared by the CPA and d. Provide a written record of the
his staff. agreement with the client as to the
b. Analysis and schedule prepared and services to be provided.
submitted to the auditor by his client's
staff. 56. Which of the following is not likely a quality
c. Excerpts or copies of documents control procedure on consultation?
furnished to the auditor. a. Identifies areas and specialized situations
d. Any report submitted by the auditor where consultation is required and
to his client. encourages personnel to consult with or
in use authoritative sources on other
52. Who are required to apply for accreditation complex matters.
with the Professional Regulation Commission b. Designates individuals as specialists to
if the applicant is a partnership of serve as authoritative sources and define
Professional Accountants? their authority in consultative situations.
a. Managing partner only c. Assigns an appropriate person or
b. All partners only persons to be responsible for
c. Partners and staff members assigning personnel to audits.
d. Partners, principals, and staff members d. Specifies the extent of documentation to
be provided for the result of consultation
53. Individual CPAs, Firms or Partnerships of in those areas and specialized situations
CPAs, including partners and staff members where consultation is required.
thereof shall register with the BOA and the
PRC. If the accreditation of Velasco and Co., 57. According to Philippine Standards on
CPAs, was renewed on September 30, 2008, Auditing, because there are inherent
the next renewal must be on or before: limitations in an audit that affect the
a. September 30, 2010 auditor's ability to detect material
b. September 30, 2011 misstatements, the auditor is:
c. December 31, 2010 a. Neither a guarantor nor an insurer
d. December 31, 2011 of financial statements.
b. A guarantor but not an insurer of the
54. The APO shall renew its Certificate of statements.
Accreditation once every how many years c. An insurer but not a guarantor of the
after the date of the Resolution granting the statements.
petition for re-accreditation and the issuance d. Both a guarantor and an insurer of the
of the said certificate upon submission of the financial statements.
requirements?
a. 2 years 58. The working papers prepared by a CPA in
b. 3 years connection with an audit engagement are
c. 4 years owned by the CPA, subject to certain
d. 6 years limitations. The rationale for this rule is to
a. Protect the working papers from being
55. Engagement letters are widely used in subpoenaed.
practice for professional engagements of all b. Provide the basis for excluding admission
types. The primary purpose of the of the working papers as evidence
engagement letter is to because of the privileged
communication rule.
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c. Provide the CPA with evidence and
documentation which may be helpful 63. Which of the following statements is true?
in the event of a lawsuit. a. It is usually easier for the auditor to
d. Establish a continuity of relationship with uncover irregularities than errors.
the client whereby indiscriminate b. It is usually easier for the auditor to
replacement of CPAs is discouraged. uncover errors than irregularities.
c. It is usually equally difficult for the
59. The responsibility for adopting sound auditor to uncover errors or irregularities.
accounting policies, maintaining adequate d. Usually, none of the given statements is
internal control, and making fair true.
representations in the financial statements
rests 64. Generally, the decision to notify parties
a. With the management. outside the client's organization regarding a
b. With the independent auditor. noncompliance with laws and regulations
c. Equally with management and the a. Independent auditor.
auditor. b. Management.
d. With the internal audit department. c. Outside legal counsel.
d. Internal auditors.
60. The ordinary examination of financial
statements is not primarily designed to 65. An audit made in accordance with Philippine
disclose defalcations and other irregularities Standards on Auditing generally should
although their discovery may result. Normal a. Be expected to provide assurance that
audit procedures are more likely to detect a noncompliance with laws and regulations
fraud arising from will be detected if the internal control is
a. Collusion on the part of several effective.
employees. b. Be relied upon to disclose indirect-effect
b. Failure to record cash receipts for noncompliance with laws and
services rendered. regulations.
c. Forgeries on company checks. c. Encompass a plan to search actively for
d. Theft of inventories. noncompliance with laws and regulations
which relate to operating aspects.
61. A principal purpose of a letter of d. Not be relied upon to provide
representation from management is to assurance that all noncompliance
a. Serve as an introduction to company with laws and regulations will be
personnel and an authorization to detected.
examine the records.
b. Discharge the auditor from legal liability 66. An auditor who believes that a material
for his examination. irregularity may exist should initially
c. Confirm in writing management's a. Discuss the matter with those believed to
approval of limitations on the scope of be involved in the perpetration of
the audit. material irregularity.
d. Remind management of its primary b. Discuss the matter with a higher
responsibility for financial level of management.
statements. c. Withdraw from the engagement.
d. Consult legal counsel.
62. The auditor should not assume that
management is dishonest, but the possibility 67. When management refuses to disclose in the
of dishonesty must be considered." This is financial statements noncompliance to laws
an example of and regulations which are identified by the
a. Expectation gap. independent auditor, the CPA may be
b. An attitude of professional charged with unethical conduct for
skepticism. a. Withdrawing from the engagement.
c. Due diligence. b. Issuing a disclaimer of opinion.
d. An ethical requirement.
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c. Failure to uncover the noncompliance to responsibility, it is referred to as
laws and regulations during the prior independence in
audits. a. Fact.
d. Reporting these activities to the audit b. Appearance.
committee. c. Conduct.
d. Total.
68. A procedure in which a quality control
partner periodically tests the application of 72. When the users of financial statements have
quality control procedures is most directly confidence in the independence of the CPA,
related to which quality control element? it is referred to as in independence in
a. Engagement performance a. Fact.
b. Independence, integrity, and objectivity b. Appearance.
c. Monitoring c. Conduct.
d. Personnel management d. Total.
69. The work of each assistant needs to be 73. When determining whether independence is
reviewed by personnel of at least equal impaired because of an ownership interest in
competence. Which of the following is not client company, materiality will affect
one of the objectives of this requirement? whether ownership is a violation of rule of
a. The conclusions expressed are consistent independence
with the result of the work performed and a. In all circumstances.
support the opinion. b. Only for direct ownership.
b. The work performed and the results c. Only for indirect ownership.
obtained have been adequately d. Under no circumstances.
documented.
c. The audit objectives have been achieved. 74. A professional accountant has a professional
d. All available evidences have been duty or right disclose confidential
obtained, evaluated and information in each of the following, except:
documented. a. To comply with technical standards and
ethics requirements.
70. Which of the following statements is true b. To disclose to the Bureau of Internal
when the CPA has been engaged to do an Revenue any fraudulent scheme
attestation engagement? committed by the client on payment
a. The CPA firm is engaged and paid by the of income tax.
client; therefore, the firm has primary c. To comply with the quality review of a
responsibility to be an advocate for the member body or professional body
client. d. To respond to an inquiry or investigation
b. The CPA firm is engaged and paid by by a member body or regulatory body.
the client, but the primary
beneficiaries of the audit are the 75. Which of the following best describes the
statement users. passing of confidential information from a
c. Should a situation arise where there is no client to its auditor? The information:
convincing authoritative standard a. Should in no circumstances be conveyed
available, and there is a choice of actions to third parties.
which could impact client's financial b. Is not legally protected and can be
statements either positively or subpoenaed by a competent court.
negatively, the CPA is free to endorse the c. Can only be released for peer reviews
choice which is best in the client's after receiving permission from the
interest. client.
d. As long as CPA firms are competent, it is d. Should be conveyed to the public if it
not required that they remain unbiased. affects the "correctness" of the financial
statements.
71. When CPAs are able to maintain an
independent attitude in fulfilling their
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76. A member in public practice may perform for a. The auditor is responsible for the failure
a contingent fee any professional services to detect material errors and frauds only
for a client for whom the member or when such failure results from the
member's firm performs misapplication of generally accepted
a. An audit. accounting principles.
b. A review. b. The auditor is responsible for the failure
c. A compilation used only by to detect material errors and frauds only
management. when the auditor fails to confirm
d. An audit of prospective financial receivables or observe inventories.
information. c. The audit should be designed to
provide reasonable assurance that
77. Which one of the following contingent fee is material errors and frauds are
allowed? detected.
a. All services performed by a CPA film. d. Extended auditing procedures are
b. Non-attestation services. required to detect unrecorded
c. Non-attestation services, unless the transactions even if there is no evidence
CPA firm was also performing that material errors and frauds may exist.
attestation services for the same
client. 82. The auditor has considerable responsibility
d. Attestation services. for notifying users as to whether or not the
statements are properly stated. This
78. When the auditor issues an erroneous imposes upon the auditor a duty to
opinion as a consequence of an underlying a. Provide reasonable assurance that
failure to comply with the requirements of material misstatements will be
generally accepted auditing standards, it detected.
results to b. Be an insurer of the fairness in the
a. Business failure. statements.
b. Audit failure. c. Be a guarantor of the fairness in the
c. Audit risk. statements.
d. All of them d. Be equally responsible with management
for the preparation of the financial
79. The responsibility for the fairness of the statements.
financial assertions that are embodied in the
financial statements and in the notes to the 83. The factor that distinguishes an error from
financial statements rests: an irregularity is
a. With the audit committee. a. Whether it is peso amount or a process.
b. With management. b. Whether it is a caused by the auditor or
c. With Securities and Exchange the client.
Commission. c. Materiality.
d. Equally with management and the d. Intent.
stockholders.
84. The reason why an auditor accumulates
80. When preparing the financial statements, it evidence is to
is acceptable for the auditor to prepare a. Defend himself in the event of a lawsuit.
a. The footnotes for client. b. Justify the conclusions he has otherwise
b. The statement for client. reached.
c. A draft of the statements and c. Satisfy the requirements of the bureau of
footnotes for client. internal revenue.
d. A draft of the statements for client. d. Enable him to reach conclusions
about the fairness of the financial
81. Which of the following statements best statements and issue an appropriate
describes the auditor's responsibility audit report.
regarding the detection of material errors
and frauds?
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85. The auditor gives an audit opinion on the fair
presentation of the financial statements and 90. An audit plan is a
associates his or her name with them when, a. Detailed plan of analytical procedures
on the basis of adequate evidence, the and all substantive tests to be performed
auditor concludes that the financial in the course of the audit.
statements are unlikely to mislead b. Document that provides an overview
a. A prudent user. of the company and a general plan
b. Management. for the audit work to be
c. The reader. accomplished, timing of the work,
d. Investors. and other matters of concern to the
audit.
86. The probability that an auditor's procedures c. Generic document that auditing firms
leading to the conclusion that a material have developed to lead the process of
error does not exist in an account balance the audit through a systematic and
when, in fact, such error does exist is logical process.
referred to as d. Budget of the time that should be
a. Prevention risk. necessary to complete each phase of the
b. Detection risk. audit procedures.
c. Inherent risk.
d. Control risk. 91. There is generally an agreement within the
auditing profession and the courts that the
87. Which of the following is not included in an auditor
audit engagement letter? a. Is both a guarantor and an insurer of the
a. Objectives of the engagement financial statements.
b. Representations that the financial b. Is a guarantor but not an insurer of the
statements were prepared in statements.
accordance with PFRS c. Is an insurer but not a guarantor of the
c. Management's responsibilities statements.
d. A clear explanation of the services to be d. Is neither a guarantor nor an insurer
performed on the engagement of financial statements.
88. Which of the following is least likely included 92. The auditor is not liable to his client for
in an auditor’s inquiry of management while a. Negligence.
obtaining information to identify the risks of b. Bad faith.
material misstatement due to fraud? c. Errors of judgment
a. Are financial reporting operations d. Dishonesty.
controlled by and limited to one
location? 93. Which of the following services provides the
b. Does it have knowledge of fraud or highest level of assurance to third parties
suspect fraud? about a company's financial statements?
c. Does it have programs to mitigate fraud a. Audit.
risks? b. Review.
d. Has it reported to the audit committee c. Compilation.
the nature of the company's internal d. Each of the above provides the same
control? level of assurance.
89. Which of the following should the auditors 94. Most accounting and auditing professionals
normally interview as part of their agree that when an audit has failed to
assessment of fraud risk? uncover material misstatements, and the
a. Senior management wrong type of audit opinion is issued, the
b. Audit committee audit firm
c. Various employees whose duties a. Has failed to follow generally accepted
financial reporting responsibilities auditing standards (GAAS).
d. All of the given choices b. Should be asked to defend the
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quality of the audit. 98. When determining whether independence is
c. Deserves to lose the lawsuit. impaired because of an ownership interest in
d. Should not be held responsible for the client company,' materiality will affect
financial loss suffered loss suffered by whether ownership is a violation of rule of
others. independence
a. In all circumstances.
95. The objective of quality control mandates b. Only for direct ownership.
that a public accounting firm should c. Only for indirect ownership.
establish policies and procedures for d. Under no circumstances.
professional development which provide
reasonable assurance that all entry-level 99. A successor auditor is required to
personnel communicate with the previous auditor. The
a. Prepare working papers which are primary concern in this communication is
standardized in form and content. a. Information which will help the
b. Will advance within the organization. successor auditor in determining
c. Develop specialties in specific areas of whether the client management has
public accounting. integrity.
d. Have the knowledge required to b. To learn about client by examining
enable them to fulfill predecessor's working papers.
responsibilities assigned. c. To enable successor auditor to perform a
more efficient audit.
96. In pursuing its quality control objectives with d. To save successor auditor time and
respect to assigning personnel to money in gathering data.
engagements, a public accounting firm may
use policies and procedures such as 100. Which statement is incorrect regarding
a. Rotating employees from assignment to the Code of Ethics for Professional
assignment on a random basis to aid in Accountants in the Philippines?
the staff training effort. a. Professional accountants refer to persons
b. Allowing staff to select the assignments who are Certified Public Accountants
of their choice to promote better client (CPA) and who hold a valid certificate
relationships. issued by the Board of Accountancy.
c. Assigning a number of employees to b. Where a national statutory
each engagement in excess of the requirement is in conflict with a
number required so as not to provision of the IFAC Code, the IFAC
overburden the staff, and interfere with Code requirement prevails.
the quality of the audit work performed. c. The Code of Ethics for Professional
d. Requiring timely identification of Accountants in the Philippines is
the staffing requirements of specific mandatory for all CPAs and is applicable
engagements so that enough to professional services performed in the
qualified personnel can be made Philippines on or after January 1, 2004.
available. d. Professional accountants should consider
the ethical requirements as the basic
97. The provision of services by a firm or principles which they should follow in
network firm to an audit client that involve performing their work.
the design and implementation of financial
information technology systems that are
used to generate information forming part of SET 8
a client's financial statements may most
likely create 1. What will an auditor who has been proposed
a. Self-interest threat. for an audit engagement usually do prior to
b. Self-review threat. accepting a new client?
c. Intimidation threat. a. Draft the financial statements of the
d. Familiarity threat, client as a measure of goodwill.

Page 80 of 100
b. With the permission from the 5. Which of the following statements is
prospective client, contact the incorrect regarding obtaining an
predecessor auditor to determine if understanding of the entity and its
there are any disagreements environment?
between the client and the audit a. Obtaining an understanding of the entity
firms. and its environment is an essential
c. Obtain the potential client's permission aspect of performing an audit in
to talk to the former auditor and review accordance with PSAs.
work papers. b. Understanding of the entity and its
d. Perform a peer review on the potential environment establishes frame of
client in accordance with professional reference within which the auditor plans
standards. the audit and exercises professional
judgment about assessing risks of
2. Which of the following statements is true material misstatement in the financial
with regard to the relationship among audit statements and responding to those risks
risk, audit evidence, and materiality? throughout the audit.
a. The lower the inherent risk and control c. The auditor's primary consideration is
risk, the lower the aggregate materiality whether the understanding that has been
threshold. obtained is sufficient to assess the risks
b. Under conditions of high inherent of material misstatement in the financial
and control risk, the auditor should statements and to design and perform
place more emphasis on obtaining further audit procedures.
external evidence and should reduce d. The depth of the overall
reliance on internal evidence. understanding that is required by
c. Where inherent risk is high and control the auditor in performing the audit
risk is low, the auditor may safely ignore is at least equal to that possessed
inherent risk. by management in managing the
d. Aggregate materiality thresholds should entity.
not change under conditions of changing
risk levels. 6. Inquiries directed towards those charged
with governance may most likely
3. Which of the following is most likely to be an a. Relate to their activities concerning the
overall response to fraud risks identified in design, and effectiveness of the entity's
an audit? internal control and whether
a. Supervise members of the audit team management has satisfactorily
less closely and rely more upon responded to any findings from these
judgment. activities.
b. Use less predictable audit b. Help the auditor understand the
procedures. environment in which the financial
c. Use only certified public accountants on statements are prepared.
the engagement. c. Relate to changes in the entity's
d. Place increased emphasis on the audit of marketing strategies, sales trends, or
objective transactions rather than contractual arrangements with its
subjective transactions. customers.
d. Help the auditor in evaluating the
4. Which of the following represents a appropriateness of the selection and
procedure that the auditor may use because application of certain accounting policies.
plausible relationships among financial
statement balances are expected to exist? 7. The underlying reason for a code of
a. Attributes testing professional conduct for any profession is
b. Enterprise risk assessment a. That it is required by congress.
c. Inherent tests of control b. The need for public confidence in
d. Analytical review the quality of service of the
profession.
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c. That it provides a safeguard to keep d. Profitability of the entity relative to its
unscrupulous people out. industry is inconsistent.
d. That it allows Professional Regulation
Commission to have a yardstick to 11. Which of the following is most likely to be
measure deficient performance. considered a risk factor relating to
fraudulent financial reporting?
8. Professional accountants may encounter a. Low turnover of senior management.
problems in identifying unethical behavior or b. Extreme degree of competition
in resolving an ethical conflict. When faced within the industry.
with significant ethical issues, professional c. Capital structure including various
accountants should do the following, except operating subsidiaries.
a. Follow the established policies of the d. Sales goals in excess of any of the
employing organization to seek a preceding three years.
resolution of such conflict.
b. Review the conflict problem with the 12. Which of the following is correct concerning
immediate superior if the organization's requirements about auditor's
policies do not resolve the ethical communications about fraud?
conflict. a. Fraud that involves senior
c. If the problem is not resolved with management should be reported
the immediate superior and the directly to the audit committee
professional accountant determines regardless of the amounts involved.
to go to the next higher managerial b. All fraud with a material effect on the
level, the immediate superior need financial statements should be reported
not be notified of the decision. directly by the auditor to the SEC
d. Seek counseling and advice on a c. Fraud with a material effect on the
confidential basis with an independent financial statements should ordinarily be
advisor or the applicable professional disclosed by the auditor through the use
accountancy body or regulatory body to of an emphasis of a matter paragraph
obtain an understanding of possible added to the audit report.
courses of action. d. The auditor has no responsibility to
disclose fraud outside the entity under
9. While assessing the risk of material any circumstances.
misstatement, the auditors identity risks,
relate risk to what could go wrong, consider 13. Which of the following factors most likely
the magnitude of risks and: would heighten an auditor's concern about
a. Assess the risk of misstatements due to the risk of fraudulent financial reporting?
noncompliance to laws and regulations. a. Large amounts of liquid assets that are
b. Consider the complexity of the easily convertible into cash.
transactions involved. b. Low growth and profitability as compared
c. Consider the likelihood that the risks to other entity's in the same industry.
could result in material c. Financial management's participation in
misstatements. the initial selection of accounting
d. Determine materiality level. principles.
d. An overly complex organizational
10. Which of the following is least likely structure involving unusual lines of
considered a financial statement audit risk authority.
factor?
a. Management operating and 14. Which of the following is most likely to be an
financing decisions are dominated overall response to fraud risks identified in
by top management. an audit?
b. A new client with no prior audit history. a. Only use certified public accountants on
c. Rate of change in the entity's industry is the engagement.
rapid.

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b. Place increased emphasis on the audit of c. Expert contracted by the firm in
objective transactions rather than connection with the audit engagement.
subjective transactions. d. Engagement team.
c. Supervise members of the audit team
less closely and rely more upon 19. It involves a study or evaluation of the
judgment. quality of audit of financial statements
d. Use less predictable audit through a review of quality control measures
procedures. established by on CPA firms and individual
CPAs in public practice to ensure compliance
15. A principal purpose of a letter of with accounting and auditing standards and
representation from management is to practices
a. Remind management of its primary a. External audit
responsibility for financial b. Compliance audit
statements. c. Peer review
b. Serve as an introduction to company d. Quality review
personnel and an authorization to
examine the records. 20. Which of the following risks is entirely a
c. Discharge the auditor from legal liability quality criterion based on professional
for his examination. judgment?
d. Confirm in writing management's a. Inherent risk
approval of limitations on the scope of b. Control risk
the audit. c. Detection risk
d. Audit risk
16. Should the auditor uncover circumstances
during the audit that may cause suspicions 21. Inherent risk is not a characteristic of the
of management fraud, the auditor must a. Major types of transactions.
a. Withdraw from engagement. b. Client’s business.
b. Issue an adverse opinion. c. Substantive procedures.
c. Issue a disclaimer. d. Effectiveness of the client’s accountants.
d. Evaluate their implications and
consider the need to modify audit 22. Misstatements must be compared to some
evidence. measurement base before a decision can be
made about the materiality of the failure to
17. In connection with the element of follow GAAP. A commonly accepted
professional development, a CPA firm's measurement base would be
system of quality control should ordinarily a. Net income.
provide that all personnel b. Total assets.
a. Possess judgment, motivation, and c. Working capital.
adequate experience. d. All of the above.
b. Seek assistance from persons having
appropriate level of knowledge, 23. The primary deliverable of an engagement
judgment, and authority. to perform based on procedures prescribed
c. Demonstrate compliance with peer by the intended user of the report is/are:
review directives. a. The Review Report
d. Have the knowledge required to b. Report of Factual Findings
enable them to fulfill c. Management Letter
responsibilities assigned. d. The financial statements
18. The implementation of quality control 24. Fraudulent financial reporting is often called:
procedures that are applicable to the a. Theft of assets
individual audit engagement is the b. Employee fraud
responsibility of the c. Management fraud
a. CPA firm. d. Defalcation
b. Engagement quality control reviewer.
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25. The ordinary examination of financial unknown third parties for:
statements is not primarily designed to a. Gross negligence.
disclose defalcations and other irregularities b. Fraudulent misconduct.
although their discovery may result. Normal c. Gross misconduct.
audit procedures are more likely to detect a d. Contributory negligence.
fraud arising from
a. Theft of inventories. 30. Of the following statements, which best
b. Collusion on the part of several distinguishes ordinary negligence from gross
employees. negligence?
c. Failure to record cash receipts for a. The more material the undetected error
services rendered. the greater the likelihood of ordinary
d. Forgeries on company checks. negligence.
b. Gross negligence is most probable when
26. Working papers prepared by a CPA in the auditor fails to detect errors that
connection with an audit engagement are occurred under conditions of strong
owned by the CPA, subject to certain internal control.
limitations. The rationale for this rule is to c. Failure to detect material errors, whether
a. Protect the working papers from, being internal control is strong or weak,
subpoenaed. suggests gross negligence.
b. Provide the CPA with evidence and d. Failure to exercise reasonable care
documentation which may be helpful denotes ordinary negligence,
in the event of a lawsuit. whereas failure to exercise minimal
c. Provide the basis for excluding admission care indicates gross negligence.
of the working papers as evidence
because of the privileged communication 31. An auditor who believes that a material
rule. irregularity may exist should initially
d. Establish a continuity of relationship with a. Consult legal counsel.
the client whereby indiscriminate b. Discuss the matter with those believed to
replacement of CPAs is discouraged. be involved in the perpetration of the
material irregularity.
27. The auditor's responsibility for failure to c. Discuss the matter with a higher
detect fraud arises level of management.
a. Whenever the amounts involved are d. Withdraw from the engagement.
material.
b. When such failure clearly results 32. Which of the following statements is correct
from noncompliance to generally concerning the auditor's responsibility with
accepted auditing standards. respect to illegal acts?
c. Only when such failure clearly results a. An auditor must design tests to detect
from negligence so gross as to sustain an both direct-effect and indirect-effect
inference of fraud on the part of the illegal acts.
auditor. b. An auditor must design tests to detect
d. Only when the examination was both immaterial and material direct-
specifically designed to detect fraud. effect illegal acts.
c. An auditor must design tests to
28. The factor that distinguishes constructive obtain reasonable assurance of
fraud from actual fraud is detecting material direct-effect
a. Materiality. illegal acts.
b. Quality of internal control. d. An auditor must design tests to detect
c. Type of error or irregularity. both material direct-effect and material
d. Intent. indirect-effect illegal acts.
29. If a CPA recklessly abandons standards of 33. If specific information comes to an auditor's
due care and diligence while performing an attention that implies the existence of
audit, he or she may be held liable to possible illegal acts that could have a
Page 84 of 100
material, but indirect effect on-the financial neither audits nor reviews of historical
statements, the auditor should next financial information, the following standard
a. Report the matter to an appropriate level applies:
of management at least one level above a. PSAs
those involved. b. PSAEs
b. Apply audit procedures specifically c. PSREs
directed to ascertaining whether an d. PSRSs
illegal act has occurred.
c. Seek the advice of an informed expert 38. Unlike consulting services, in assurance
qualified to practice law as to possible services:
contingent liabilities. a. There is confirmation that financial
d. Discuss the evidence with the client's statement assertions are accurate.
audit committee, or others with b. Misstated account balances are generally
equivalent authority. corrected by an independent audit.
c. Ineffective internal controls may exist.
34. When planning the audit, if the auditor has d. Competing interests may exist
no reason to believe that illegal acts exist, between management and the users
the auditor should of statements.
a. Include audit procedures which have a
strong probability of detecting illegal 39. The attest function:
acts. a. Is an essential part of every engagement
b. Make inquiries of management performed by a CPA.
regarding their policies and b. Includes the preparation of a written
regarding their knowledge of report of the CPA's conclusion.
violations, and then rely on normal c. Requires a complete review of all
audit procedures to detect errors, transactions during the period under
irregularities, and illegalities. examination.
c. Still include some audit procedures d. Requires a review of a sample of
designed specifically to uncover transactions during the period under
illegalities. examination.
d. Ignore the topic.
40. Which of the following is an assurance
35. When the auditor knows that an illegal act service?
has occurred, the auditor must a. Performance measurement
a. Issue an adverse opinion. b. Systems design and installation
b. Withdraw from the engagement. c. Tax planning
c. Report it to the proper government d. Personal financial planning
authorities.
d. Consider the effects on the financial 41. Non-assurance engagements include all of
statements, including the adequacy the following services, except:
of disclosure. a. Agreed-upon procedures engagements.
b. Compilations of financial or other
36. Assurance services differ from consulting information.
services in that they c. Management and tax consulting.
I. Focus on providing advice. d. Examination of prospective financial
information.
II. Involve monitoring of one party by
another. 42. Unlike consulting services, assurance
a. I only. services:
b. II only. a. Make recommendation to management.
c. Both I and II. b. Report on how to use information.
d. Neither I nor II. c. Are two-party contracts.
d. Report on the quality of information.
37. For assurance engagements which are
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43. Identify the correct statement. engagement can either be established or
a. Accounting services do not provide specifically developed. Established criteria
attestation. are those
b. Management consulting services provide a. Designed for the purpose of the
attestation in all cases. engagement.
c. An audit provides limited assurance by b. Embodied in laws or regulations or
attesting to the fairness of the client's issued by authorized or recognized
assertions. bodies of experts that follow a
d. A review provides positive assurance by transparent due process.
attesting the reliability of the client's c. Made available to the intended users.
assertions. d. Not made available to the intended
users.
44. An attestation engagement is one in which a
CPA is engaged to: 49. A practitioner should accept an assurance
a. Assemble prospective financial engagement only if
statements based on the assumptions of a. The practitioner's conclusion is to be
the entity's management without contained in a written report.
expressing any Testify as an expert b. The subject matter is the responsibility of
witness in accounting, auditing or tax either the intended users or the
matters, given certain stipulated facts. practitioner.
b. assurance. c. The subject matter is in the form of
c. Issue a written communication financial information.
expressing a conclusion about the d. The criteria to be used are not available
reliability of a written assertion that to the intended users.
is the responsibility of another
party. 50. Assurance engagement risk is the risk
d. Provide tax advice or prepare a tax return a. Of expressing an inappropriate
based on financial information the CPA conclusion when the subject matter
has not audited or reviewed. information is not materially misstated.
b. That the practitioner expresses an
45. Assurance engagements encompass the inappropriate conclusion when the
following types of services, except: subject matter information is
a. Audit of historical financial statements. materially misstated.
b. Review engagements. c. Of expressing an inappropriate
c. Management consulting. conclusion when the subject matter
d. Attestation services. information is either materially misstated
or not materially misstated.
46. Criteria that are embodied in laws or d. Through loss from litigation, adverse
regulations, or issued by authorized or publicity, or other events arising in
recognized bodies of experts that follow a connection with a subject matter
transparent due process are called: reported on.
a. Suitable criteria
b. General criteria 51. The following are components of assurance
c. Established criteria engagement risk, except
d. Specifically developed criteria a. Detection risk
b. Business risk
47. Which of the following is not a characteristic c. Inherent risk
of suitable criteria? d. Control risk
a. Completeness
b. Neutrality 52. The predominant type of attestation service
c. Relevance performed by CPAs is:
d. Comparability a. Audit.
b. Review.
48. The criteria to be used for a particular c. Compilation.
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d. Management consulting.
59. Which of the following is the single feature
53. Which of the following is incorrect regarding that most clearly distinguishes auditing,
a compilation engagement? attestation, and assurance:
a. The CPA uses his auditing expertise a. CPA's approach to the service.
to collect, classify and summarize b. Type of service.
financial information. c. Scope of services.
b. The CPA should exercise due care. d. Training necessary to perform the
c. The engagement ordinarily entails service.
reducing detailed data to a manageable
and understandable form. 60. For assurance engagements regarding
d. The procedures performed do not enable historical financial information, reasonable
the accountant to express any form of assurance engagements are called:
assurance. a. Review engagements.
b. Audit engagements.
54. The type of assurance that is provided by c. Compilation engagements.
the CPA on a compilation report is: d. Agreed-upon procedures engagements.
a. Limited assurance.
b. No assurance. 61. In some assurance engagements, the
c. Low assurance. evaluation or measurement of the subject
d. Negative assurance. matter is performed by the responsible
party, and the subject matter information is
55. A report on factual findings is the end in the form of an assertion by the
product of the auditor when performing: responsible party that is made available to
a. Audit. intended users. These engagements are
b. Review. called
c. Agreed-upon procedures. a. Recurring engagements
d. Compilation. b. Non-assurance engagements
c. Direct reporting engagements
56. What assurance is provided by the auditor in d. Assertion-based engagements
an agreed-upon procedures engagement?
a. No assurance. 62. What type of assurance engagement is
b. Low. involved when the practitioner expresses a
c. Moderate. positive form of conclusion?
d. Reasonable. a. Positive assurance engagement
b. Limited assurance engagement
57. The term "accountant" has been used by c. Reasonable assurance engagement
Auditing and Assurance Standards Council to d. Absolute assurance engagement
refer to a CPA in public practice who is
engaged to: 63. What type of assurance engagement is
a. Audit financial statements. involved when the practitioner expresses a
b. Review financial statements. negative form of conclusion?
c. Apply agreed-upon procedures. a. Negative assurance engagement
d. Compile financial statements. b. Assertion-based assurance engagement
c. Limited assurance engagement
58. Which of the following best describes d. Reasonable assurance engagement
relationships among auditing, attest and
assurance services? 64. Assurance engagements involve:
a. Attest is a type of auditing service. a. Two separate parties: a professional
b. Assurance is a type of attest service. accountant and intended users.
c. Auditing is a type of assurance b. Two separate parties: a professional
service. accountant and a responsible party.
d. Auditing and attest services represent
two distinctly different types of services.
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c. Three separate parties: a professionals have always had a duty to
practitioner, a responsible party and provide a level of care which is
intended users. a. Reasonable.
d. Three separate parties: a professional b. Greater than average.
accountant, a responsible party, and c. Superior.
intended users. d. Guaranteed to be free from error.
65. The auditor's evaluation of the likelihood of 69. The principal issue to be resolved in cases
material employee fraud is normally done involving alleged negligence is usually
initially as a part of a. The amount of the damages suffered by
a. The assessment of whether to accept the the users of the financial statements.
audit engagement. b. Whether to impose punitive damages on
b. Understanding the entity's internal defendant.
control structure. c. The level of care required to be
c. The Tests of Controls. exercised.
d. The Tests of Transactions. d. Whether defendant was involved in
fraud.
66. In which circumstance is a CPA firm's
independence most likely to be impaired? 70. Privity of contract exists between the
a. An individual on the audit has a close a. Auditor and the Securities and Exchange
relative who is a receptionist for the Commission.
client. b. Auditor and client.
b. The father of the audit senior holds a c. Auditor and third parties.
material financial interest in the client of d. All of the above
which the senior is unaware.
c. The spouse of a staff member on the 71. A CPA is criminally liable if he
audit has an immaterial common a. Refuses to turn over the schedules or
stock investment in the audit client. working papers prepared by the client
d. The partner in charge of the office's staff to the client.
compensation is affected by office b. Performs an audit in a negligent manner.
profitability, a portion of which arises c. Intentionally allows an omission of a
from this audit. material fact required to be stated
in a financial statement.
67. Which of the following partners is least likely d. Was not able to submit the audited
to be considered a "covered member" for financial statements on time.
purposes of rendering assurance service to
of Company A, a nonaudit client, performed 72. The auditor's defense of contributory
by the head office of a national CPA firm? negligence is most likely to prevail when
a. The partner in charge of the Davao a. Third party injury has been minimal.
office. b. The client is privately held as contrasted
b. The partner in charge of the entire CPA with a public company.
firm. c. Undetected errors have resulted in
c. A partner in the Cebu office of the materially misleading financial
CPA firm who maintains a small, statements.
immaterial investment in Company d. The auditor fails to detect fraud
A. resulting from management override
d. A partner in the Davao office who worked of the control structure.
on the Company A for a different
assurance engagement in previous 73. An expectation of the public is that the
years, but currently has no auditor will recognize that the primary users
responsibilities with respect to the of audit services are:
engagement a. The employees
b. The investors and creditors
68. While performing services for their clients, c. The SEC
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d. The board of directors
78. Similar to auditors in the CPA realm, internal
74. The overriding objective of the International auditors also strive to possess:
Auditing Standards that are issued by the a. Independence
International Auditing Practices Committee b. Competence
of the IFAC is c. Objectivity
a. To override a country’s regulations d. All of the above
governing the audit of financial
statements. 79. A review engagement differs in scope as
b. To improve the uniformity of compared to an audit due to
auditing practices and related a. The subject matter of the audit.
services throughout the world. b. The quantity and type of evidence
c. To provide a uniform application of obtained.
specific audit procedures that are c. Ethical requirements with respect to
acceptable worldwide. independence.
d. To replace generally accepted auditing d. The users of the financial statements.
standards.
80. Which of the following statements
75. Management’s assertions in the financial concerning the intended user of a
statements are relevant to the audit process professional accountant's report is incorrect?
because: a. The responsible party and the intended
a. They provide evidence that auditors user may both be within the same
have prepared financial statements in organization.
accordance with GAAP b. The intended user should never be
b. They embody the audit procedures that established by agreement between
will be performed by the audit the practitioner and the responsible
engagement team. party or those engaging or
c. They include representations of employing the practitioner.
financial statements in accordance c. In some circumstances, the intended
with the applicable reporting user may be established by law.
criteria d. The responsible party may also be one of
d. They relate to regulator’s expectations the intended users.
about audit results.
81. The network firms are required to be
76. A CPA firm is considered independent when independent of the client
it performs which of the following services a. For assurance engagements
for a publicly traded audit client? provided to an audit client.
a. Serving as a member of the client’s b. For assurance engagements provided to
board of directors. clients that are not audit clients, when
b. Accounting information system design the report is not expressly restricted for
and implementation. use by identified users.
c. Tax return preparation as approved c. For assurance engagements provided to
by the board of directors. clients that are not audit clients, when
d. Determining which accounting policies the assurance report is expressly
will be adopted by the client. restricted for use by identified users.
d. All of the above
77. Jessie Cruz, CPA, forgot to test a client’s
assessment of goodwill impairment during 82. One difference between auditors and other
an audit. Such an act is probably an professionals is that most professionals
example of: a. Need not be concerned about
a. Due diligence remaining independent.
b. Reckless professional behavior b. Do not have requirements for continuing
c. Ordinary negligence education beyond college.
d. Fraud c. Do not have to pass a rigorous
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examination. d. Neither are issued to CPAs.
d. Are not expected to act in public interest.
89. Examples of circumstances that may create
83. The Code of Professional Conduct would be self-interest threat include:
violated if a member accepted a fee for a. Contingent fees relating to assurance
services and the fee was engagements.
a. Fixed by a public authority. b. A direct financial interest or material
b. Based on a price quotation submitted in indirect financial interest in an assurance
competitive bidding. client.
c. Based on the result of judicial c. A loan or guarantee to or from an
proceedings. assurance client or any of its directors or
d. Payable after a specified finding was officers.
attained. d. All of the above
84. For which of the following services is a CPA 90. Which of the following least likely create
professional required to be independent? "self-interest threat"?
a. Audits of historical financial statements a. Undue dependence on total fees from an
b. Review services assurance client.
c. Examination of prospective financial b. Concern about the possibility of losing
statements the engagement.
d. All of the above c. Having a close business relationship with
an assurance client.
85. For which of the following services is a CPA d. Pressure to reduce inappropriately
professional not required to be independent? the extent of work performed in
a. Tax returns preparation order to reduce fees
b. Audits of historical financial statements
c. Review engagement 91. The integrated national professional
d. Examination of a forecast organization of Certified Public Accountants
accredited by the BOA and the PRC per PRC
86. It occurs when a firm or a member of the accreditation No. 15 dated October 2, 1975.
assurance team could benefit from a a. Philippine Institute of Certified
financial interest in, or other self-interest Public Accountants (PICPA)
conflict with, an assurance client. b. Auditing and Assurance Standards
a. Self-interest threat Council (AASC)
b. Self-review threat c. Financial Reporting Standards Council
c. Advocacy threat (FRSC)
d. Familiarity threat d. Education Technical Council (ETC)
87. The CPA title was conceived and created, 92. A CPA-lawyer, acting as a legal counsel to
under the first accountancy law, for one of his audit client, is an example of
professional accountants engaged in which a. Self-interest threat
of the following? b. Self-review threat
a. Accounting education c. Advocacy threat
b. Public accounting d. Familiarity threat
c. Management accounting
d. Government accounting 93. Intimidation threat
a. Is not a threat to independence.
88. Regarding practice of accountancy, which of b. Occurs when a member of the
the following certificates is issued to a CPA assurance team may be deterred
first, a certificate of registration or a from acting objectively and
certificate of accreditation? exercising professional skepticism
a. Certificate of registration by threats, actual or perceived, from
b. Certificate of accreditation the directors, officers or employees
c. Both are issued at the same time of an assurance client.
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c. Occurs when, by virtue of a close a. Self-interest threat.
relationship with an assurance client, its b. Self-review threat.
directors, officers or employees, a firm or c. Intimidation threat.
a member of the assurance team d. Familiarity threat.
becomes too sympathetic to the client's
interests. 98. Immediate family includes
d. Occurs when a firm, or a member of the a. Parent.
assurance team, promotes, or may be b. Sibling.
perceived to promote, an assurance c. Non-dependent child.
client's position or opinion to the point d. Spouse.
that objectivity may, or may be
perceived to be, compromised. 99. Which of the following is not likely a threat
to independence?
94. Eman, a CPA, has a law practice. Eman has a. Acting as an advocate on behalf of an
recommended one of his clients to Noel, a assurance client in litigation or in
CPA. Noel has agreed to pay Eman 10% of resolving disputes with third parties.
the fee for services rendered by Noel to b. Long association of a senior member of
Eman's client. Who, if anyone, is in the assurance team with the assurance
violation of the Code of Ethics? client.
a. Both Eman and Noel c. Threat of replacement over a
b. Eman only disagreement with the application of an
c. Neither Eman and Noel accounting principle.
d. Noel only d. Owning immaterial indirect financial
interest in an audit client.
95. If a member of the assurance team, or their
immediate family member receives, by way SET 9
of, for example, an inheritance, gift or, as a
result of a merger, a direct financial interest 1. This is the traditional service provided by
or a material indirect financial interest in the CPA firms.
assurance client, a self-interest threat would a. Tax services
be created. The following safeguards should b. Compilation
be applied to eliminate the threat or reduce c. Reviews
it to an acceptable level: d. Audits
a. Disposing of the financial interest at the
earliest practical date. 2. The billing arrangement based on actual
b. Removing the member of the assurance time spent by audit engagement team is
team from the assurance engagement. a. Flat sum basis
c. Either a or b b. Per diem basis
d. Neither a nor b c. Maximum fee basis
d. Retainer basis
96. Occurs when, by virtue of a close
relationship with an assurance client, its 3. Professionals are expected to conduct
directors, officers or employees, a firm or a themselves at a higher level than
member of the assurance team becomes a. Anyone else.
too sympathetic to the client's interests. b. Their clients.
a. Self-interest threat c. Most other members of society.
b. Self-review threat d. Most other members of their profession.
c. Advocacy threat
d. Familiarity threat 4. A candidate who fails in two (2) complete
CPA examinations shall be:
97. A former officer, director or employee of the a. Reverted to undergraduate status.
assurance client serves as a member of the b. Forever banned from taking another set
assurance team. This situation will least of examinations
likely create
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c. Considered as having passed the procedures to be able to draw
examination, under the rule of efforts reasonable conclusions.
and professional mercy.
d. Required to take a refresher course 8. Which of the following statements does not
before making another attempt at properly describe an element of the
the CPA Board exams. theoretical framework of auditing?
a. An audit benefits the public.
5. Which of the following statements is correct b. The data to be audited can be verified.
concerning an auditor's responsibilities c. Auditors act on behalf of
regarding financial statements? management.
a. The auditor's report should provide an d. Short-term conflicts may exist between
assurance as to the future viability of the managers who prepare data and
entity. auditors who examine the data.
b. Making suggestions that are adopted
about the form and content of an entity's 9. Which of the following criteria is unique to
financial statements impairs an auditor's the independent auditor's attest function?
independence. a. Independence.
c. An auditor's responsibilities for b. General competence.
audited financial statements are c. Due professional care.
confined to the expression of the d. Familiarity with the particular industry of
auditor's opinion. each client.
d. The fair presentation of audited financial
statements in accordance with an 10. Auditing is based on the assumption that
applicable financial reporting framework financial data are verifiable. Data are
is an implicit part of the auditor's verifiable when two or more qualified
responsibilities. individuals,
a. Working together, can prove, beyond
6. Which of the following statements does doubt, the accuracy of the data.
not properly describe a limitation of an b. Working independently, can prove,
audit? beyond reasonable doubt, the
a. Many financial statement assertions truthfulness of the data.
cannot be audited. c. Working independently, each reach
b. Many audit conclusions are made on essentially similar conclusions.
the basis of examining a sample of d. Working together, can agree upon the
evidence. accuracy of the data.
c. The work, under taken by the auditor is
permeated by judgment. 11. The QRC shall have the following functions:
d. Fatigue and human weaknesses a. Conduct quality control review on
can cause auditors to overlook applicants for registration to
pertinent evidence. practice public accountancy and
render a report on such quality
7. Which of the following is not one of the review.
general principles governing the audit of b. Mete out sentences of imprisonment to
financial statements? CPAs who fail to present a valid system of
a. The auditor should conduct the audit in quality control.
accordance with PSA. c. Revoke the certificate of registration and
b. The auditor should comply with the professional ID of an individual CPA, firm,
Philippine Code of Professional Ethics. or partnership of CPAs who have not
c. The auditor should plan and perform observed quality control measures and
the audit with an attitude of who has not complied with the standards
professional skepticism. of quality prescribed for the practice of
d. The auditor should obtain sufficient public accountancy.
appropriate evidence primarily d. All of these.
through inquiry and analytical
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12. The need for independent audits of financial material misstated.
statements can be attributed to all of the d. The client's financial statements
following conditions except: may be materially false and
a. Validity misleading.
b. Remoteness
c. Consequence 17. Which of the following is a cause of
d. Complexity of subject matter information risk?
a. Voluminous data.
13. The underlying conditions that create b. Biases and motives of the provider of
demand by users for reliable information information.
include the following except: c. Remoteness of the information.
a. Decisions are not time-sensitive. d. Each of the above is a cause of
b. Transactions that are numerous and information risk.
complex.
c. Users separated from accounting 18. In financial statement audits, the audit
records by distance and time. process should be conducted in accordance
d. Financial decisions that are important to with
investors and users. a. The audit program
b. Philippine Accounting Standards
14. Why does a company choose to have an c. Philippine Standards on Auditing
independent auditor report on its financial d. Philippine Financial Reporting Standards
statements?
a. Independent auditors will always detect 19. The overall objective of forensic auditing is
management fraud. to
b. Independent auditors guarantee the a. Attest to the efficiency with which
accuracy of the financial statements. resources are employed
c. The company preparing the b. Assist members of the organization in the
statements may have a vested effective discharge of their
interest in reporting certain results. responsibilities
d. An independent audit is designed to c. Unearth the truth and provide
search for deficiencies in the company's evidence in legal and financial
internal controls. disputes
d. Provide assurance that financial data
15. Which of the following statements does not have been accurately recorded
describe a condition that creates a demand
for auditing? 20. Which of the following types of auditing is
a. Users can directly assess the performed most commonly by CPA's on a
quality of information. contractual basis?
b. Information can have substantial a. Internal auditing
economic consequences for a decision b. Income tax auditing
maker. c. External auditing
c. Expertise is often required for d. Government auditing
information preparation and verification.
d. Conflict between an information 21. Which of the following types of audits is
preparer and a user can result in biased performed to determine whether an entity's
information. financial statements are fairly stated in
conformity with generally accepted
16. Information risk refers to the risk that accounting principles?
a. The client may not be able to remain in a. Operational audit
business. b. Compliance audit
b. Errors and frauds would not be detected c. Performance audit
by the auditor's procedures. d. Financial statement audit
c. The auditor may express an unqualified
opinion on financial statements that are
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22. Which of the following has the primary statements, taken as a whole.
responsibility for the fairness of the
representations made in the financial 26. Which of the following is one of the
statements? limitations of an audit?
a. Audit committee a. Nature of evidence obtained
b. Client's management b. Inadequacy of the accounting records
c. Independent auditor c. Confidentiality of information
d. Board of Accountancy d. Scope limitations imposed by the entity
23. The best statement of the responsibility of 27. Which of the following statements does
the auditor with respect to audited financial not properly describe a limitation of an
statement is: audit?
a. The auditor's responsibility on fair a. Many audit conclusions are made on
presentation of financial the basis of examining a sample of
statements is limited only up to evidence.
the date of the audit report. b. The work, under taken by the auditor is
b. The auditor's responsibility is permeated by judgment.
confined to the expression of opinion c. Fatigue and human weaknesses
on the financial statements audited. can cause auditors to overlook
c. The responsibility over the financial pertinent evidence.
statements rests with the management d. Many financial statement assertions
and the auditor assumes responsibility cannot be audited.
with respect to the notes of financial
statements. 28. Financial statements audits:
d. The auditor is responsible only to his a. Reduce the cost of capital
qualified opinion but not for any other b. Report on compliance with laws and
type of opinion. regulations
c. Assess management's efficiency
24. The level of assurance provided by a d. Overlook information risk
professional accountant on an audit report
is: 29. In relation to auditing, which of the following
a. Low is an incorrect phrase?
b. Reasonable a. Auditing is a systematic process.
c. Moderate b. Auditing subjectively obtains and
d. None evaluates evidence.
c. Auditing evaluates evidence regarding
25. Reasonable assurance means: assertions.
a. Gathering of all available corroborating d. Auditing communicates results to
evidence for the auditor to conclude that interested users.
there are no material misstatements in
the financial statements, taken as a 30.Broadly defined, the subject matter of any
whole. audit consists of
b. Gathering of the audit evidence a. Economic data
necessary for the auditor to conclude b. Financial statements
that the financial statements, taken as a c. Assertions about economic actions
whole, are free from any misstatements. and events
c. Gathering of the audit evidence d. Operating data
necessary for the auditor to conclude
that the financial statements are free of 31. Auditing is based on the assumption that
material unintentional misstatements. financial data and statements are
d. Gathering of the audit evidence a. Verifiable
necessary for the auditor to b. In conformity with the identified
conclude that there are no material applicable financial reporting framework
misstatements in the financial c. Presented fairly
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d. Consistently applied c. When accepting a new engagement with
an existing client
32. The firm should establish a system of quality d. All of these.
control designed to provide it with
reasonable assurance regarding: 37. The following methods are most likely to
a. Compliance with professional standards develop capabilities and competence,
b. Compliance with regulatory and legal except:
requirements a. Professional education.
c. Appropriateness of reports issued by the b. Continuing professional development,
firm or engagement partners including training.
d. All of the above c. Work experience and coaching by
less experienced staff
33. A process designed to provide an objective d. Self-study modules on professional
evaluation, before the report is issued, of the accounting and auditing literature.
significant judgments the engagement team
made and the conclusions they reached in 38. Consultation is usually undertaken for:
formulating the report. a. Difficult or contentious matters.
a. Peer review b. Matters for which there is readily
b. Inspection available support.
c. Engagement quality control review c. Matters for which the judgment of the
d. Monitoring engagement leader is deemed sufficient.
d. Straightforward matters involving
34. A process comprising an ongoing accounting and auditing.
consideration and evaluation of the firm's
system of quality control, including a 39. The standard-setting body whose chairman
periodic inspection of a selection of had been or presently a senior accounting
completed engagements, designed to practitioner in any scope of accounting
enable the firm to obtain reasonable practice is
assurance that its system of quality control a. AASC
is operating effectively. b. FRSC
a. Inspection c. PICPA
b. Monitoring d. ACPAPP
c. Peer review
d. Engagement quality control review 40. The chairman and the members of the AASC
and FRSC shall have a term of
35. The firm should obtain written confirmation a. 1 year.
of compliance with its policies and b. 3 years.
procedures on independence from all firm c. 3 years with no renewal.
personnel required to be independent by the d. 3 years renewable for another term.
Code of Ethics at least:
a. Annually 41. The benefits of an operational audit
b. Every 3 years generally include all of the following except
c. Every 2 years a. Decreased costs.
d. Every 5 years b. Increased revenue
c. Increased productivity.
36. The firm should obtain acceptance and d. Increased reliability of the financial
continuance information as it considers statements.
necessary in the following circumstances:
a. When accepting an engagement with a 42. The auditor is required to comply with all
new client PSAs relevant to the audit of an entity's
b. When deciding whether to continue an financial statements. A PSA is relevant to
existing engagement the audit when:
I. The PSA is in effect.

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II. The circumstances addressed by the c. Technically proficient.
PSA exist. d. All of the above
a. I only
b. II only 47. The Code of Professional Ethics states, in
c. Either I or II part, that a CPA should maintain integrity
d. Both I and II and objectivity. Objectivity refers to the
CPA's ability to
43. Preplanning the audit involves several key a. Determine accounting practices that
activities which include the following except: were consistently applied.
a. Investigating the client's background. b. Maintain an impartial attitude on all
b. Communicating with the prospective matters which come under his
client's prior auditor to inquire about any review.
disagreements with the client. c. Determine the materiality of items.
c. Understanding the client's reasons for d. Insist on all matters regarding audit
obtaining an audit. procedures.
d. Determining the likelihood of issuing
an unqualified audit opinion on the 48. A professional accountant may be
client's financial statements. associated with a tax return that
a. Contains a false or misleading statement.
44. Which of the following is incorrect regarding b. Contains statements or information
professional competence? furnished recklessly or without any real
a. Professional accountants may knowledge of whether they are true or
portray themselves as having false.
expertise or experience they do not c. Omits or obscures information required
possess. to be submitted and such omission or
b. Professional competence may be divided obscurity would mislead the revenue
into two separate phases. authorities.
c. The attainment of professional d. Uses of estimates if such use is
competence requires initially a high generally acceptable or if it is
standard of general education. impractical under the circumstances
d. The maintenance of professional to obtain exact data.
competence requires a continuing
awareness of development in the 49. Prior to beginning the field work on a new
accountancy profession. audit engagement in which a CPA does not
possess expertise in the industry in which
45. The following procedures relate to Skills and the client operates, the CPA should
Competence, except a. Reduce audit risk by lowering the
a. Identify criteria which will be considered preliminary levels of materiality.
in evaluating individual performance and b. Design special substantive tests to
expected proficiency. compensate for the lack of industry
b. Provide procedures for maintaining expertise.
the firm's standards of quality for c. Engage financial experts familiar with the
the work performed. nature of the industry.
c. Establish qualifications and guidelines for d. Obtain a knowledge of matters that
evaluating potential hirees at each relates to the nature of the entity's
professional level. business.
d. Provide, to the extent necessary,
programs to fill the firm's needs for 50. Which of the following is not one of the
personnel with expertise in specialized duties of the Commission on Audit
and industries. a. Keep the general accounts of the
government
46. It is essential that users regard CPA firms as b. Promulgate accounting rules and
a. Competent. regulations
b. Unbiased.
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c. Define the scope of its audit and a. Assess control risk as "high" for the
examination assertions affected by the prior-period
d. Assume fiscal responsibility for the information.
government and its b. Seek permission with the client in using
instrumentalities the prior period information obtained by
the auditor.
51. The early appointment of the independent c. Determine whether changes have
auditor has many advantages to the auditor occurred that may affect the
and the client. Which of the following relevance of such information in the
advantages is least likely to occur as a result current audit.
of early appointment of the auditor? d. Determine whether to equitably reduce
a. The auditor will be able to plan the audit the audit fee due to lower audit effort
work so that it may be done expended during the engagement.
expeditiously.
b. The auditor will be able to complete 55. Relevant industry conditions include the
the audit work in less time. following, except:
c. The auditor will be able to better plan for a. The market and competition, including
the observation of the physical demand, capacity and price competition.
inventories. b. Regulatory framework for a
d. The auditor will be able to perform the regulated industry.
examination more efficiently and will be c. Cyclical or seasonal activity.
finished at an early date after the year- d. Product technology relating to the
end. entity's products.
52. Which of the following is the most likely first 56. An auditor obtains an understanding of the
step an auditor would perform at the entity and its environment in order to
beginning of an initial audit engagement? a. Make constructive suggestions
a. Prepare a rough draft of the financial concerning improvements to the client's
statements and of the auditor's report. internal control.
b. Study and evaluate the system of b. Understand the events and
internal administrative control. transactions that may have an effect
c. Tour the client's facilities and review on the client's financial statements.
the general records. c. Evaluate whether the aggregation of
d. Consult with and review the work of the known misstatements causes the
predecessor auditor prior to discussing financial statements taken as a whole to
the engagement with the client be materially misstated.
management. d. Develop an attitude of professional
skepticism concerning management's
53. An extensive understanding of the client's financial statement assertions.
business and industry and knowledge about
the company's operations are essential for 57. Maintaining or providing access to adequate
doing an adequate audit. For a new client, reference libraries and other authoritative
most of this information is obtained sources is a procedure that is most likely
a. From the Securities and Exchange performed to comply with the policy of
Commission. a. Monitoring
b. From the predecessor auditor. b. Ethical requirements
c. From the permanent file. c. Assignment
d. At the client's premises. d. Consultation
54. When the continuing auditor intends to use 58. A process designed to provide an objective
information about the entity and its evaluation, before the report is issued, of the
environment obtained in prior periods, the significant judgments the engagement team
auditor should: made and the conclusions they reached in
formulating the report is called:
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a. Inspection
b. Documentation 63. Which of the following statements are
c. Monitoring factors to consider whether the firm has the
d. Engagement quality control review capabilities, competence, time and
resources to undertake a new audit
59. A CPA firm would be reasonably assured of engagement from a prospective client:
meeting its responsibility to provide I. Firm personnel have knowledge of
professional services that conform with relevant industries.
professional standards by: II. The firm has sufficient personnel with
a. Maintaining an attitude of independence the necessary capabilities and
in its engagements. competence.
b. Adherence to generally accepted III. Experts are available, if needed.
auditing standards. IV. The firm is able to complete the
c. Having an appropriate a system of engagement within the reporting
quality control. deadline.
d. Continuing professional education. a. I and II only
b. II and IV only.
60. At the beginning of the current audit c. II, III and IV only
engagement, the auditor should perform key d. I, II, III and IV
preplanning activities which include all of the
following except: 64. The element of the audit planning process
a. Performing procedures regarding client most likely to be agreed upon with the client
acceptance or continuance. before implementation of the audit strategy
b. Evaluating compliance with ethical is the determination of the
requirements. a. Methods of statistical sampling to be
c. Establishing an understanding of the used in confirming accounts receivable.
terms of the engagement. b. Pending legal matters to be included in
d. Considering internal control. the inquiry of the client's attorney.
c. Evidence to be gathered to provide a
61. When a CPA is approached to perform an sufficient basis for the auditor's opinion.
audit for the first time, the CPA should make d. Schedules and analyses to be
inquiries of the predecessor auditor. This is prepared by the client's staff.
a necessary procedure because the
predecessor may be able to provide the 65. The understanding between the client and
successor with information that will assist the auditor as to the degree of
the successor in determining responsibilities to be assumed by each is
a. Whether, in the predecessor's opinion, normally set forth in a(an)
internal control of the company has been a. Management letter.
satisfactory. b. Representation letter.
b. Whether the engagement should be c. Engagement letter.
accepted. d. Comfort letter.
c. Whether the predecessor's work should
be utilized. 66. Which of the following best describes the
d. Whether the company follows the policy purpose of the engagement letter?
of rotating its auditors. a. The engagement letter conveys to
management the detailed steps to be
62. Which of the following will an auditor least applied in the audit process.
likely discuss with the former auditors of a b. The engagement letter relieves the
potential client prior to acceptance? auditor of some responsibility for the
a. Disagreements with management exercise of due care.
regarding accounting principles c. By clearly defining the nature of the
b. Integrity of management engagement, the engagement letter
c. Fees charged for services helps avoid and resolve
d. Reasons for changing audit firms misunderstandings between CPA and
Page 98 of 100
client regarding the precise nature management lacks integrity.
of the work to be performed and the d. To lessen the exposure to litigation
type of report to be issued. resulting from failure to detect
d. The engagement letter should be signed irregularities in client financial
by both the client and the CPA and statements.
should be used only for independent
audits. 70. Which of the following is prohibited by the
Code of Professional Ethics for CPAs?
67. Which of the following statements would a. Use of a firm name which includes the
least likely appear in an auditor's name of a retired partner.
engagement letter? b. Accepting an engagement or
a. Our engagement is subject to the risk employment which one cannot
that material errors, fraud, and reasonably expect to complete or
defalcations, if they exist, will not be discharge with professional
detected. competence.
b. During the course of our audit we may c. Announcement in a newspaper of the
observe opportunities for economy in, or opening of a public accounting office.
improved controls over, your operations. d. Engaging in civic activities during
c. After performing our preliminary business hours.
analytical procedures we will discuss
with you the other procedures we 71. Which of the following statements best
consider necessary to complete the describes why the profession of certified
engagement. public accountants has deemed it essential
d. Fees for our services are based on our to promulgate a code of ethics and to
regular per diem rates, plus travel and establish a mechanism for enforcing
other out-of-pocket expenses. observance of the code?
a. The law requires an establishment of a
68. Which of the following is an element of code of ethics.
"directing an audit assistant" objective? b. A distinguishing mark of a
a. Identifying in advance the staffing profession is its acceptance of
requirements of a particular audit responsibility to the public.
engagement. c. A prerequisite to success is the
b. Resolving any differences in professional establishment of an ethical code that
judgment between audit personnel. stresses primarily the professional's
c. Resolution of differences in audit responsibility to clients and colleagues.
findings. d. An essential means of self-protection for
d. Informing assistants of their the profession is the establishment of
responsibilities and the objectives flexible ethical standards by the
of the procedures they are to profession.
perform.
72. Which of the following is not one of the
69. A CPA establishes quality control policies qualifications of the members of the Board
and procedures for deciding whether to of Accountancy?
accept a new client or continue to perform a. He/She must not be a director or officer
services for a current client. The primary of PICPA at the time of his appointment.
purpose for establishing such policies and b. He/She must be a natural-born citizen
procedures is and a resident of the Philippines.
a. To enable the auditor to attest to the c. He/She must be a duly Certified
integrity or reliability of a client. Public Accountant with at least ten
b. To comply with the quality control years of experience in practice of
standards established by regulatory public accountancy.
bodies. d. He/She must not have any direct or
c. To minimize the likelihood of indirect pecuniary interest in any school,
association with clients whose college, university, or institution offering
Page 99 of 100
a BS Accountancy course or institution c. A person shall be considered to be in
conducting review classes in preparation the professional practice of
for the licensure examination at the time accounting if, as an officer in a
of his appointment to the Board. private enterprise, he makes
decisions requiring professional
73. The following statements relate to the RA accounting knowledge.
9298. Which statement is true? d. After three years, subject to certain
a. The Professional Regulation Commission conditions, the Board of Accountancy
has the authority to remove any member may order the reinstatement of a CPA
of the Board of Accountancy for whose certificate of registration has been
negligence, incompetence, or any other revoked.
just cause.
b. No person shall be appointed as a
member of the Board of
Accountancy unless he has been in
the practice of accountancy for at
least 10 years, among others.
c. Insanity is not a ground for proceeding
against a CPA.
d. After three years, subject to certain
conditions, the Board of Accountancy
may order the reinstatement of a CPA
whose certificate of registration has been
revoked.
74. Special/temporary permit may be issued by

the Board to the following persons except:
a. A foreign CPA engaged as a professor or
lecturer in the fields essential to
accountancy education in the Philippines.
b. A foreign CPA called for consultation or
specific purpose which is essential for the
development of the country and that
there are no Filipino CPAs qualified for
such consultation or specific purpose.
c. A foreign CPA who can prove that
the country of which he or she is a
citizen admits citizens of the
Philippines to the practice of the
same profession without restriction.
d. A foreign CPA with specialization in any
branch of accountancy and his/her
service is essential for the advancement
of accountancy in the Philippines.
75. The following statements relate to RA 9298.

Which statement is true?
a. Insanity is not a ground for proceeding
against a CPA.
b. The Professional Regulation Commission
has the authority to remove any member
of the Board of Accountancy for
negligence, incompetence, or any other
just cause.
Page 100 of 100

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AUDITING THEORY c.

Except in examinations of interim

AT – Prelim Rev (875 MCQs) Red Sirug

43. For the purpose of expressing negative

AT – Prelim Rev (875 MCQs) Red Sirug

6. The following statements relate to the three

24. An unqualified conclusion is not appropriate

AT – Prelim Rev (875 MCQs) Red Sirug

AT – Prelim Rev (875 MCQs) Red Sirug

AT – Prelim Rev (875 MCQs) Red Sirug

AT – Prelim Rev (875 MCQs) Red Sirug

AT – Prelim Rev (875 MCQs) Red Sirug

46. Which of the following is incorrect regarding

AT – Prelim Rev (875 MCQs) Red Sirug

AT – Prelim Rev (875 MCQs) Red Sirug

AT – Prelim Rev (875 MCQs) Red Sirug

74. Special/temporary permit may be issued by

75. The following statements relate to RA 9298.

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