LLCM REFRESHER COURSE

AUDITING March 26, 2023

FINAL EXAMINATION

MULTIPLE CHOICE QUESTIONS

1. Which of the following procedures would an auditor least likely perform in planning a financial
statement audit?
A. Selecting a sample of vendors’ invoices for comparison to receiving reports.
B. Coordinating the assistance of entity personnel in data preparation.
C. Discussing matters that may affect the audit with firm personnel responsible for non-audit
services to the entity.
D. Reading the current year interim financial statements.

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

3. Sandy requested permission to communicate with the predecessor auditor and review certain
portions of the predecessor’s working papers. The prospective client’s refusal to permit this
will bear directly on Sandy’s decision concerning the
A. Adequacy of the preplanned audit program.
B. Ability to establish consistency in application of accounting principles between years.
C. Apparent scope limitation.
D. Integrity of management.

4. Early in an audit, the auditor discovered several fraud risk factors. Which of the following is
the least likely response of the auditor?
A. Substantive test procedures are moved away from the end of the client’s accounting
period so that differences can be more easily resolved.
B. The auditor should attempt to incorporate in the audit more elements of unpredictability.
C. The auditor should attempt to gather more audit evidence through physical inspection.
D. Analytical procedure should still be applied but at a more disaggregated level.

5. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of
the
A. Factors that raise doubts about the auditability of the financial statements.
B. Operating effectiveness of internal controls.
C. Risk that material misstatements exist in the financial statements.
D. Possibility that the nature and extent of substantive tests may be reduced.

6. When an auditor has a question concerning a client’s ability to continue as a going concern,
the auditor considers management’s plans for dealing with the situation. That consideration
is most likely to include consideration of management’s plans to
A. decrease ownership equity.
B. dispose of assets.
C. increase expenditures on key products.
D. invest in derivative securities.
7. An abnormal fluctuation in gross profit that might suggest the need for extended audit
procedures for sales and inventories would most likely be identified in the planning phase of
the audit by the use of
A. tests of transactions and balances.
B. a preliminary review of internal control.
C. specialized audit programs.
D. analytical procedures.

8. SAXOPHONE COMPANY acquires a new manufacturing equipment on January 1, 2023, on

installment basis. The deferred payment contract provides for a down payment of P300,000
and an 8-year note for P3,104,160. The note is to be paid in 8 equal annual installment
payments of P388,020, including 10% interest. The payments are to be made on December
31 of each year, beginning December 31, 2023. The equipment has a cash price equivalent
of P2,370,000. Saxophone’s financial year-end is December 31.

What is the acquisition cost of the equipment?

A. P3,404,160
B. P2,804,160
C. P3,104,160
D. P2,370,000

9. Which of the following statements correctly defines the term reasonable assurance?
A. A substantial level of assurance to allow an auditor to detect a material misstatement.
B. A significant level of assurance to allow an auditor to detect a material misstatement.
C. An absolute level of assurance to allow an auditor to detect a material misstatement.
D. A high, but not absolute, level of assurance to allow an auditor to detect a material
misstatement.

10. A client is presenting comparative (two-year) financial statements. Which of the following is
correct concerning reporting responsibilities of a continuing auditor?
A. The auditor should issue one audit report that is on both presented years.
B. The auditor should issue two audit reports, one on each year.
C. The auditor should issue one audit report, but only on the most recent year.
D. The auditor may issue either one audit report on both presented years, or two audit
reports, one on each year.

11. An audit team has concluded that inventory is highly susceptible to misappropriation and that
a potential misstatement would be material to the financial statements. How should the audit
team address the audit procedures to the increased risk?
A. Review the client’s control procedures over the safeguarding of inventory, and perform a
physical inventory count on the last day of the current year.
B. Review the client’s control procedures over the safeguarding of inventory, incorporate the
use of substantive analytical procedures, and develop an expectation.
C. Review the client’s control procedures over the safeguarding of inventory, but do not
modify substantive procedures over inventory.
D. Review the client’s control procedures over the safeguarding of inventory, and perform
physical inventory counts throughout the current year.

12. Which of the following procedures regarding notes payable would an accountant most likely
perform during a review engagement?
A. Confirming the year-end outstanding note payable balance with the lender.
B. Examining records indicating proper authorization of the notes payable.
C. Making inquiries of management regarding maturities, interest rate, and collateral.
D. Documenting control procedures for payment calculations of the notes’ principal and
interest.

13. Which of the following statements is correct concerning statistical sampling in tests of
controls?
A. As the population size increases, the sample size should increase proportionately.
B. Deviations from specific internal control procedures at a given rate ordinarily result in
misstatements at a lower rate.
 C. There is an inverse relationship between the expected population deviation rate and the
sample size.
D. In determining tolerable rate, an auditor considers detection risk and the sample size.

14. An examination of a financial forecast is a professional service that involves

A. compiling or assembling a financial forecast that is based on management’s assumptions.
B. limiting the distribution of the accountant’s report to management and the board of
directors.
C. assuming responsibility to update management on key events for one year after the
report’s date.
D. evaluating the preparation of a financial forecast and the support underlying
management’s assumptions.

15. Which of the following factors would most likely influence the form and extent of the auditor’s
documentation of an entity’s internal control environment?
A. Complexity and size of the entity.
B. Amount of audit work performed at an interim date.
C. Amount of audit work performed by the internal auditor.
D. Results of verifying material account balances.

16. Which of the following statements is correct regarding an accountant’s working papers?
A. The accountant owns the working papers and generally may disclose them as the
accountant sees fit.
B. The client owns the working papers but the accountant has custody of them until the
accountant’s bill is paid in full.
C. The accountant owns the working papers but generally may not disclose them without
the client’s consent or a court order.
D. The client owns the working papers but, in the absence of the accountant’s consent, may
not disclose them without a court order.

17. If an audit firm discovers threats to independence with respect to an audit engagement, the
Code of Ethics indicates that the firm should
A. immediately resign from the engagement.
B. notify the appropriate regulatory body.
C. document the issue.
D. evaluate the significance of the threats and apply appropriate safeguards to reduce them
to an acceptable level.

18. Assessing control risk at a low level most likely would involve
A. performing more extensive substantive tests with larger sample sizes than originally
planned.
B. reducing inherent risk for most of the assertions relevant to significant account balances.
C. changing the timing of substantive tests by omitting interim-date testing and performing
the tests at year-end.
D. identifying specific controls relevant to specific assertions.

19. As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses
control risk higher than appropriate. The most likely explanation for this situation is that:
A. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation
rate in the population exceeds the tolerable rate.
B. The deviation rates of both the auditor's sample and the population exceed the tolerable
rate.
C. The deviation rates of both the auditor's sample and the population are less than the
tolerable rate.
D. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation
rate in the population is less than the tolerable rate.

20. A requirement that working papers be reviewed by the supervisor, and any deficiencies be
discussed with the preparer is an example of a quality control procedure in the area of
A. acceptance and continuance of client relationships and specific engagements.
B. engagement performance.
 C. human resources.
D. relevant ethical requirements.

21. Using laptop computers in conducting financial statement audits may affect the methods used
to review the work of staff assistants because
A. Supervisory personnel may not have an understanding of the capabilities and limitations
of computers.
B. Working paper documentation may not contain readily observable details of calculations.
C. The overall audit objectives may differ.
D. Documenting the supervisory review may require assistance of management services
personnel.

22. In which circumstance will the auditor not consider the need to modify the report?
A. The client’s legal counsel is requested to advise whether a material act is legal or illegal
but refuses to do so.
B. The auditor concludes that the effect of an illegal act creates substantial doubt about the
entity’s ability to continue as a going concern.
C. The auditor concludes that the effect of an illegal act, taken alone or with similar acts, is
material in amount and has not been properly accounted for or disclosed in the financial
statements.
D. All of the circumstances require modification of the auditor’s report.

23. Which of the following procedures would be appropriate to test the existence assertion during
an audit of accounts receivable?
A. Trace transactions from the subsidiary ledger to the general ledger.
B. Send confirmations to customers.
C. Trace a sample of invoices to recording in the general ledger.
D. Determine that all shipments before year end are recorded as sales.

24. During an audit of an entity’s financial statements, an auditor should perform tests of controls
to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant
controls if
A. the auditor does not presume that client management has committed fraud.
B. more financial documentation is available through tests of controls.
C. substantive procedures alone cannot provide sufficient appropriate audit evidence.
D. the auditor does not intend to rely on the operating effectiveness of controls.

25. Which of the following statements ordinarily is not included among the written client
representations made by the chief executive officer and the chief financial officer?
A. "Sufficient evidential matter has been made available to the auditor to permit the issuance
of an unmodified opinion."
B. "There are no unasserted claims or assessments that our lawyer has advised us are
probable of assertion and must be disclosed."
C. "We have no plans or intentions that may materially affect the carrying value or
classification of assets and liabilities."
D. "No events have occurred subsequent to the balance sheet date that would require
adjustment to, or disclosure in, the financial statements."

26. Eleanor issued P10,000,000 of 10% bonds on July 1, 2022. The prevailing market rate of
interest for these bonds was 12% on the date of issue. The bonds will mature on July 1,
2032. Interest is paid semiannually on July 1 and January 1. Eleanor uses the effective
interest rate method to amortize bond premium or discount.

The following present value factors are taken from the present value tables:

Present value of 1 at 12% for 10 periods 0.32917

Present value of 1 at 6% for 20 periods 0.31180
Present value of an ordinary annuity of 1 at 12%
for 10 periods 5.65022
Present value of an ordinary annuity of 1 at 6%
for 20 periods 11.46992
 How much was received by Eleanor from the sale of the bonds on July 1, 2022?
A. P8,852,960
B. P10,000,000
C. P10,500,000
D. P10,647,040

27. The following are the benefits claimed for the practice of determining materiality in the initial
planning stage of starting an audit, except
A. avoiding the problem of doing too little work (underauditing).
B. avoiding the problem of doing more work than necessary (overauditing).
C. being able to decide early what kind of audit opinion to express.
D. being able to fine tune the audit work for effectiveness and efficiency.

28. In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine

whether the estimates are
A. not subject to bias.
B. consistent with industry guidelines.
C. based on objective assumptions.
D. reasonable in the circumstances.

29. A client is a defendant in a patent infringement lawsuit against a major competitor. Which of
the following items would least likely be included in the attorney's response to the auditor's
letter of inquiry?
A. A description of potential litigation in other matters or related to an unfavorable verdict in
the patent infringement lawsuit.
B. A discussion of case progress and the strategy currently in place by client management
to resolve the lawsuit.
C. An evaluation of the probability of loss and a statement of the amount or range of loss if
an unfavorable outcome is reasonably possible.
D. An evaluation of the ability of the client to continue as a going concern if the verdict is
unfavorable and maximum damages are awarded.

30. During the year, the research staff of Buni Co. devoted its entire efforts toward developing a
skin cancer ointment. All costs that could be attributed directly to the project were accounted
for as deferred charges and classified on the statement of financial position as an asset. If
the amounts involved are material, the auditor should
A. express an unmodified opinion with an emphasis of matter paragraph explaining the
uncertainty of cost recovery.
B. disclaim an opinion.
C. express an adverse opinion.
D. express an unmodified opinion provided that the uncertainty about ultimate realization of
the deferred charges is disclosed in the notes.

31. The objective of a reasonable assurance engagement is a reduction in assurance engagement

risk
A. to a level that is acceptable in the circumstances of the engagement as a basis for a
negative form of expression of the practitioner’s conclusion.
B. to an acceptably low level in the circumstances of the engagement as a basis for a positive
form of expression of the practitioner’s conclusion.
C. to a level that is acceptable in the circumstances of the engagement as a basis for a
qualified form of expression of the practitioner’s conclusion.
D. to a very low level in the circumstances of the engagement as a basis for a disclaimer of
the practitioner’s conclusion.

32. What is the responsibility of a successor auditor with respect to communicating with the
predecessor auditor in connection with a prospective new audit client?
A. The successor auditor has no responsibility to contact the predecessor auditor.
B. The successor auditor should obtain permission from the prospective client to contact the
predecessor auditor.
 C. The successor auditor should contact the predecessor auditor regardless of whether the
prospective client authorizes contact.
D. The successor auditor need not contact the predecessor if the successor is aware of all
available relevant facts.

33. The negative form of accounts receivable confirmation request is useful except when
A. internal control surrounding accounts receivable is considered to be effective.
B. a large number of small balances are involved.
C. the auditor has reason to believe the persons receiving the requests are likely to give
them consideration.
D. individual account balances are relatively large.

34. An auditor expressed a qualified opinion on the prior year’s financial statements because of a
lack of adequate disclosure. These financial statements are properly restated in the current
year and presented in comparative form with the current year’s financial statements. The
auditor’s updated report on the prior year’s financial statements should
A. be accompanied by the auditor’s original report on the prior year’s financial statements.
B. continue to express a qualified opinion on the prior year’s financial statements.
C. make no reference to the type of opinion expressed on the prior year’s financial
statements.
D. express an unmodified opinion on the restated financial statements of the prior year.

35. An auditor concludes that there is a material inconsistency in the other information in an
annual report to shareholders containing audited financial statements. The auditor believes
that the financial statements do not require revision, but the client is unwilling to revise or
eliminate the material inconsistency in the other information. Under these circumstances,
what action would the auditor most likely take?
A. Consider the situation closed because the other information is not in the audited financial
statements.
B. Issue an "except for" qualified opinion after discussing the matter with the client's audit
committee.
C. Disclaim an opinion on the financial statements after explaining the material inconsistency
in a separate “other matter” paragraph.
D. Revise the auditor's report to include a separate “other matter” paragraph describing the
material inconsistency.

36. The Code of Ethics for Professional Accountants in the Philippines provides the categories of
threats that could compromise or could be perceived to compromise a professional
accountant’s compliance with the fundamental principles. The threat that the professional
accountant will not appropriately evaluate the results of a previous judgment made or service
performed on which the accountant will rely when forming a judgment as part of providing a
current service is called
A. advocacy threat.
B. familiarity threat.
C. self-review threat.
D. intimidation threat.

37. An auditor concludes that the omission of a substantive procedure considered necessary at
the time of the audit may impair the auditor’s current ability to support the previously
expressed opinion. The auditor need not apply the omitted procedure if the
A. risk of adverse publicity or litigation is low.
B. results of other procedures that were applied tend to compensate for the procedure
omitted.
C. auditor’s opinion was qualified because of a departure from PFRS.
D. results of the subsequent period’s tests of controls make the omitted procedure less
important.

38. At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the
financial statements. With regard to the valuation of inventory, the auditor concludes that the
evidence obtained is not sufficient to support management's representations. Which of the
following actions is the auditor most likely to take?
 A. Consult with the audit committee and issue a disclaimer of opinion.
B. Consult with the audit committee and issue a qualified opinion.
C. Obtain additional evidence regarding the valuation of inventory.
D. Obtain a statement from management supporting their inventory valuation.

39. Familiarity threat could be created under the following circumstances, except
A. A member of the engagement team is the spouse of the accounting manager of the client.
B. A member of the engagement team is the spouse of one of the members of the Board of
Directors of the client.
C. Senior personnel of the engagement team having a long association with the assurance
client.
D. A professional accountant accepting gifts from a client whose value is inconsequential or
trivial.

40. A principal purpose of a letter of representation from management is to

A. serve as an introduction to company personnel and an authorization to examine the
records.
B. discharge the auditor from legal liability for the audit.
C. confirm in writing management’s approval of limitations on the scope of the audit.
D. remind management of its primary responsibility for financial statements.

41. Ariel, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to
financial data supplied by Modesta Co. regarding Modesta's written assertion about its
compliance with contractual requirements to pay royalties. Ariel's report on these agreed-
upon procedures should contain a (an)
A. Disclaimer of opinion about the fair presentation of Modesta's financial statements.
B. List of the procedures performed and Ariel's findings.
C. Opinion about the effectiveness of Modesta's internal control activities concerning royalty
payments.
D. Acknowledgment that the sufficiency of the procedures is solely Ariel's responsibility.

42. Which of the following matters is an auditor required to communicate to those charged with
governance?
A. Adjustments that were suggested by the auditor and recorded by management that have
a significant effect on the entity's financial reporting process.
B. The auditor's consideration of risk factors in assessing the risk of material misstatement
arising from the misappropriation of assets.
C. The results of the auditor's analytical procedures performed in the review stage of the
engagement that indicate significant variances from expected amounts.
D. Changes in the auditor's preliminary judgment about materiality that were caused by
projecting the results of statistical sampling for tests of transactions.

43. A CPA has been engaged to perform review services for a client. Identify which of the
following is a correct statement.
A. The CPA must perform the basic audit procedures necessary to determine that the
statements are in conformity with the applicable financial reporting framework.
B. The financial statements are primarily representations of the CPA.
C. The CPA may prepare the statements from the books but may not assist in adjusting and
closing the books.
D. The CPA is performing an assurance engagement other than an audit of the financial
statements.

44. Which of the following best describes the responsibility of the CPA in performing compilation
services for a company?
A. The CPA must understand the client’s business and accounting methods, and read the
financial statements for reasonableness.
B. The CPA has only to satisfy himself or herself that the financial statements were
prepared in conformity with PFRS.
C. The CPA should obtain an understanding of internal control and perform tests of
controls.
D. The CPA is relieved of any responsibility to third parties
45. According to PSA 710, Communicating Key Audit Matters in the Independent Auditor’s Report,
the auditor shall determine, from the matters communicated with those charged with
governance those matters that required significant auditor attention in performing the audit.

In making this determination, which of the following should be taken into account?
I. Areas of higher assessed risk of material misstatement, or significant risks identified
in accordance with PSA 315.
II. Significant auditor judgment relating to areas in the financial statements that involved
significant management judgment.
III. The effect on the audit of significant events or transactions that occurred during the
period.
A. I and II only.
B. II and III only.
C. I and III only.
D. I, II, and III.

46. If the financial statements have been prepared using the going concern basis of accounting
but, in the auditor’s judgment, management’s use of the going concern basis of accounting
is inappropriate, the auditor shall express a/an
A. Unmodified opinion, but the auditor’s report should include an “Other matter” section that
describes the inappropriate use of the going concern basis of accounting.
B. Unmodified opinion if the financial statements disclose the inappropriate use of the going
concern basis of accounting.
C. Qualified or Adverse opinion if the financial statements fail to disclose the inappropriate
use of the going concern basis of accounting.
D. Adverse opinion regardless of whether or not the financial statements include disclosure
of the inappropriateness of management’s use of the going concern basis of accounting.

47. Which of the following events most likely would indicate the existence of related parties?
A. Selling real estate at a price significantly different from appraised value.
B. Granting stock options to key executives at favorable prices.
C. High turnover of senior management and members of the board of directors.
D. Failure to correct internal control weaknesses on a timely basis.

48. Which of the following sections of the auditor’s report shall always be presented first?
A. Auditor’s Responsibility for the Audit of the Financial Statements.
B. Responsibilities for the Financial Statements.
C. Opinion.
D. Key Audit Matters.

49. In obtaining written representations from management, materiality limits ordinarily would
apply to representations related to:
A. Amounts concerning related party transactions.
B. Irregularities involving members of management.
C. The availability of financial records.
D. The completeness of minutes of directors' meetings.

50. An auditor plans to apply substantive tests to the details of asset and liability accounts as of
an interim date rather than as of the balance sheet date. The auditor should be aware that
this practice:
A. Eliminates the use of certain statistical sampling methods that would otherwise be
available.
B. Presumes that the auditor will reperform the tests as of the balance sheet date.
C. Should be especially considered when there are rapidly changing economic conditions.
D. Potentially increases the risk that errors that exist at the balance sheet date will not be
detected

The END.