CHAPTER 13

1. Which of the following best describes the primary purpose of audit procedures?
a. To detect errors or irregularities.
b. To comply with financial reporting standards.
c. To gather corroborative evidence.
d. To verify the accuracy of account balances.

2. As a result of analytical procedures, the independent auditor determines that the

gross profit has declined from 30% in the preceding year to 20% in the current year. The
auditor should
a. document management's intentions with respect to plans for reversing this trend.
b. evaluate management's performance in causing this decline.
c. require footnote disclosure.
d. consider the possibility of an error in the financial statements.

3. The auditor will most likely perform extensive tests for possible understatement of
a. revenues.
b. assets.
c. liabilities.
d. capital.

4. Which of the following elements ultimately determines the specific auditing

procedures necessary under the circumstances to afford a reasonable basis for an
opinion?
a. Auditor judgment.
b. Materiality.
c. Relative risk.
d. Reasonable assurance.

5. In testing the existence assertion for an asset, an auditor ordinarily works from the
a. financial unrecorded items to the financial statements.
b. potentially unrecorded items to the financial statements.
c. accounting records to the supporting evidence.
d. supporting evidence to the accounting records.
6. A basic premise underlying the application of analytical procedures is that
a. the study of financial ratios is an acceptable alternative to the investigation of unusual
fluctuations.
b. statistical tests of financial information may lead to the discovery of material errors in
the financial statements.
c. plausible relationships among data may reasonably be expected to exist and continue
in the absence of known conditions to the contrary.
d. these procedures cannot replace tests of balances and transactions.

7. Which of the following circumstances is most likely to cause an auditor to consider

whether a material misstatement exists?
a. Transactions selected for testing are not supported by proper documentation.
b. The turnover of senior accounting personnel is exceptionally low.
c. Management places little emphasis on meeting earnings projections.
d. Operating and financing decisions are dominated by several persons.

8. An auditor's analytical procedures most likely will be facilitated if the entity

a. corrects material weaknesses in internal control before the beginning of the audit.
b. develops its data from sources solely within the entity.
c. segregates obsolete inventory before the physical inventory count
d. uses a standard cost system that produces variance reports.

CHAPTER 14

1. Lewi, CPA, is planning the audit of Jen's Company. Jen verbally asserts to Lewi that
all the expenses for the year have been recorded in the accounts. Jen's representation
in this regard:
a. is sufficient evidence for Lewi to conclude that the completeness assertion is
supported for the expenses.
b. can enable Lewi to minimize his work on the assessment of control risk for the
completeness of expenses.
c. should be disregarded because it is not in writing.
d. is not considered a sufficient basis for Lewi to conclude that all expenses have been
recorded.

2.The evidence considered most appropriate or competent by auditors is best described

as:
a. internal documents such as sales invoice copies produced under conditions of strong
internal control.
b. written representations made by the president of the company.
c. documentary evidence obtained directly from independent external sources.
d. direct personal knowledge obtained through physical observation and mathematical
recalculation.

3. Which of the following audit procedures would provide the least reliable evidence that
the client has legal title to inventories?
a. Confirmation of inventories at locations outside the client's facilities
b. Analytical review of inventory balances compared to purchasing and sales activities
c. Observation of physical inventory counts
d. Examination of paid vendors' invoices

4. Of the following, which is the least persuasive type of audit evidence?

a. Documents mailed by outsiders to the auditor
b. Correspondence between auditor and vendors
c. Copies of sales invoices inspected by the auditor
d. Computations made by the auditor

5. Which of the following statements is generally correct about the competence of

evidential matter
a. The auditor's direct personal knowledge, obtained through observation and
inspection, is more persuasive than information obtained indirectly from independent
outside sources.
b. To be competent, evidential matter must be either valid or relevant, but it need not be
both.
c. Accounting data alone may be considered sufficient, competent evidential matter
from which to issue an unqualified opinion on financial statements.
d. Competence of evidential matter refers to the amount corroborative evidence to be
obtained.

6. Audit programs should be designed so that

a. most of the required procedures can be performed as interim work
b. inherent risk is assessed at a sufficiently low level.
c. the auditor can make constructive suggestions to management.
d. the audit evidence gathered supports the auditor's conclusions.

7. Which of the following procedures would provide the most reliable audit evidence?
a. Inquiries, held in private, of the client's internal audit staff
b. Inspection of pre-numbered client purchase orders filed in the vouchers payable
department
c. Analytical procedures performed by the auditor on the entity's trial balance
d. Inspection of bank statements obtained directly from the client's financial institution

8. Which of the following presumptions does not relate to the competence of audit
evidence?
a. The more effective internal control is, the more assurance it provides about the
accounting data and financial statements.
b. An auditor's opinion, to be economically useful, is formed within a reasonable time
and based on evidence obtained at a reasonable cost.
c. Evidence obtained from independent sources outside the entity is more reliable than
evidence secured solely from within the entity.
d. The independent auditor's direct personal knowledge, obtained through observation
and inspection, is more persuasive than information obtained directly.

9. Which of the following presumptions is correct about the reliability of evidential

matter?
a. Information obtained indirectly from outside sources is the most reliable evidential
matter.
b. To be reliable, evidential matter should be convincing rather than persuasive.
c. Reliability of evidential matter refers to the amount of corroborative evidence
obtained.
d. Effective internal control provides more assurance about the reliability of evidential
matter

10. Which of the following factors is most important in determining the appropriateness
of audit evidence?
a. The reliability of the evidence in meeting the audit objective
b. The objectivity of the auditor gathering the evidence
c. The independence of the source of evidence
d. The quantity of the evidence obtained

11. Which of the following is the best definition? Appropriate evidence is evidence that
a. is reasonably free of error and bias and faithfully represents what it purports to
represent.
b. is obtained by observing people, property, and events.
c. is supplementary to other evidence already given and tends to strengthen or confirm
it.
d. proves an intermediate fact, or group of facts, from which one can infer the existence
of some other fact that is significant to the issue under consideration.

12. In testing the reasonableness of interest income, an auditor could most effectively
use analytical procedures involving
a. the beginning balance in the investments account for fixed-income securities.
b. the average monthly balance in the investments account for fixed income securities.
c. the ending balance in the investments account for fixed-income securities.
d. documentary support of specific entries in the account.

13. An auditor's preliminary analysis of accounts receivables revealed the following

turnover rates: 2015 (4.3%); 2014 (6.2%); 2013 (7.3%). Which of the following is the
most likely cause of the decrease, in accounts receivable turnover?
a. Increase in the cash discount offered
b. Liberalization of credit policy
c. Shortening of due-date terms
d. Increased cash sales

CHAPTER 15

1. In an audit sampling application, an auditor:

a. performs procedures on all the items in a balance and makes a conclusion about the
whole balance.
b. performs procedures on less than 100 percent of the items in a balance and
formulates a conclusion about the whole balance.
c. performs procedures on less than 100 percent of the items in a class of transactions
for the purpose of becoming familiar with the client's accounting system.
d. performs analytical procedures on the client's unaudited financial statements when
planning the audit.

2. Auditors consider statistical sampling to be characterized by the following:

a. representative sample selection and nonmathematical consideration of the results.
b. carefully biased sample selection and statistical calculation of the results.
c. representative sample selection and statistical calculation of the results.
d. carefully biased sample selection and nonmathematical consideration of the results.

3. In audit sampling applications, sampling risk is:

a. characteristics of statistical sampling applications but not of nonstatistical
applications.
b. the probability that the auditor will fail to recognize erroneous accounting in the
client's documentation.
c. probability that accounting errors will arise in transactions and enter the accounting
system.
d. the probability that an auditor's conclusion based on a sample might be different from
the conclusion based on an audit of the entire population.

4. Which of the following should be considered an audit procedure for obtaining

evidence?
a. An audit sampling application in accounts receivable selection.
b. The accounts receivable exist and are valued properly.
c. Sending a written confirmation on a customer's account balance.
d. Nonstatistical consideration of the amount of difference reported by customer on a
confirmation response.

5. Which of the following elements in the audit risk model is/are a product of the auditors
professional judgment?
a. Control risk.
b. Analytical procedures risk.
c. Test of details risk of incorrect acceptance.
d. All of the above.
6. Which of the following is an element of sampling risk?
a. Choosing an audit procedure that is inconsistent with the audit objective.
b. Concluding that no material misstatement exists in a materially misstated population
based on taking a sample that includes no misstatement.
c. Failing to detect an error on a document that has been inspected by an auditor.
d. Failing to perform audit procedures that are required by the sampling plan.

7. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing
control risk too high relate to the:
a. efficiency of the audit.
b. effectiveness of the audit.
c. selection of the sample.
d. audit quality controls

8. In planning a statistical sample for tests of controls, an auditor increases the expected
population exception rate from the prior year's rate because of the results of the prior
year's tests of controls. As a result, the auditor would most likely increase the planned
a. tolerable exception rate.
b. allowance for sampling risk.
c. acceptable risk of assessing control risk too low.
d. sample size.

9. From a random sample of items listed from a client's inventory count, an auditor
estimates with a 90 percent confidence level that the computed upper exception rate
(CUER) is between 4 percent and 6 percent. The auditors major concern is that there is
one chance in twenty that the true exception rate in the population is
a. more than 6 percent.
b. less than 6 percent.
c. more than 4 percent.
d. less than 4 percent.

10. If, from a random sample, an auditor can state with a 5 percent acceptable risk of
assessing control risk too low (ARACR) that exception rate in the population does not
exceed 20 percent, he or she can state that the exception rate does not exceed 25
percent with
a. 5 percent risk.
b. risk greater than 5 percent.
c. risk less than 5 percent.
d. This cannot be determined from the information provided.

CHAPTER 16

1. Test of control audit procedures are required for

a. obtaining evidence about the financial statement assertions.
b. accomplishing control over the validity of recorded transactions.
c. analytical review of financial statement balances.
d. obtaining evidence about the operating effectiveness of client control procedures.

2. When auditing the client's performance of control to accomplish the completeness

objective related to ensuring that all sales are recorded, auditors should draw sample
items from:
a. the sales journal list of recorded sales invoices.
b. the file of shipping documents.
c. the file of customer order copies.
d. the file of receiving reports for inventory additions.

3. Nia Wilson was considering the sample size needed for a selection of sales invoices
for the test of controls audit of the Elmar Company's internal controls. She presented
the following information for two alternative cases (insert table). Nia should expect the
sample size for Case A to be:

a. smaller than the sample size for Case B.

b. larger than the sample size for Case B.
c. the same as the sample size for Case B.
d. not determinable relative to the Case B sample size.
4. When auditors plan a test of controls and think about several control risk
assessments that could be made, they also can think about:
a. one relevant tolerable deviation rates.
b. two relevant tolerable deviation rates.
c. three relevant tolerable deviation rates.
d. many relevant tolerable deviation rates.

5. Which of the following combinations results size in a sample for attributes?

Ans: C

6. To determine the sample size for a test of controls, an auditor should consider the
tolerable occurrence rate, the allowable risk of assessing control risk too low, and the
a. expected occurrence rate.
b. upper precision limit.
c. risk of incorrect acceptance.
d. risk of incorrect rejection.

7. An auditor desired to test credit approval on 10,000 sales invoices processed during
the year. The auditor designed a statistical sample that would provide a 1 percent risk of
assessing control risk too low (99%% confidence) that not more than 7 percent of the
sales invoices lacked approval. The auditor estimated from previous experience that
about 2 % of the sales invoices lacked approval. A sample of 200 invoices was
examined; 7 of them were lacking approval. The auditor then determined the upper
occurrence limit to be 8%.
In the evaluation of this sample, the auditor decided to increase the level of the
preliminary assessment of control risk because the
a. tolerable rate (7%) was less than the achieved upper occurrence limit (8%).
b. expected occurrence rate (7%) was more than the percentage of errors in the sample
(3 4%).
c. achieved upper occurrence limit (8%) was more than the percentage of errors in the
sample (3 1/2%).
d. expected occurrence rate (2 1/2%) was less than the tolerable rate (7%).

8. The allowance for sampling risk (precision) was

a. 5 1/2%.
b. 4 1/2%.
c. -3 1/2 %.
d. 1%.

9. An auditor who uses statistical sampling for attributes in testing internal controls
should increase the assessed level of control risk when the
a. sample rate of error is less than the expected rate of error used in planning the
sample.
b. tolerable rate less than allowance for sampling risk exceeds tolerable rate.
c. sample rate of error plus the allowance for sampling risk exceeds the sample rate of
error.
d. sample rate of error plus the allowance for sampling risk equals the tolerable rate.

10. An auditor plans to examine a sample of 20 checks for countersignatures as

prescribed by the client's internal control procedures. One of the checks in the chosen
sample of 20 cannot be found. The auditor should consider the reasons for this
limitation and
a. evaluate the results as if the sample size had been 19.
b. treat the missing check as an error for the purpose of evaluating the sample.
c. treat the missing check in the same manner in which the majority of the other 19
checks are treated, that is, as countersigned or not.
d. choose another check to replace the missing check in the sample.

11. Which of the following controls would be most effective in assuring that recorded
purchases are free of material errors?
a. The receiving department compares the quantity ordered on purchase orders with the
quantity received on receiving reports.
b. Vendors' invoices are compared with purchase orders by an employee who is
independent of the receiving department.
c. Receiving reports require the signature of the individual who authorized the purchase.
d. Purchase orders, receiving reports, and vendors' invoices vendors are matched
independently in preparation of vouchers.

12. To determine whether accounts payable are complete, an auditor performs a test to
verify that all merchandise received is recorded. The population of documents for this
test consists of all
a. vendors' invoices.
b. purchase orders.
c. receiving reports.
d. canceled checks.

13. Samples to test internal control procedures are intended to provide a basis from
which an auditor can conclude whether
a. the control procedures are operating effectively.
b. the financial statements are materially misstated.
c. the risk of incorrect acceptance is too high.
d. materiality for planning purposes is at a sufficiently low level.

14. The diagram below depicts the auditor's estimated maximum deviation rate
compared with the tolerable rate, and also depicts the true population deviation rate
compared with the tolerable rate:

As a result of tests of controls, the auditor assesses control risk is higher than
necessary, and thereby increases substantive testing. This illustrated by situation
a. I
b. II
c. III.
d. IV.

15. Which of the following statements is correct concerning statistical sampling in tests
of controls?
a. Deviations from control procedures at a given rate usually result in misstatements at
a higher rate.
b. As the population size doubles, the sample size also should double.
c. The qualitative aspects of deviations are not considered by the auditor.
d. There is an inverse relationship between the sample size and the tolerable
occurrence rate.

16. What is an auditor's evaluation of a statistical sample for attributes when a test of S0
documents results in 3 deviations, if the tolerable occurrence rate is 7%, the expected
occurrence rate is 5%, and the allowance for sampling risk is 2%?
a. Modify the planned assessed level of control risk, because the tolerable rate plus the
allowance for sampling risk exceeds the expected population deviation rate.
b. Accept the sample results as support for the planned assessed level of control risk,
because the sample deviation rate plus the allowance for sampling risk exceeds the
tolerable rate.
c. Accept the sample results as support for the planned assessed level of control risk,
because the tolerable rate less the allowance for sampling risk equals the expected
population deviation rate.
d. Modify the planned assessed level of control risk, because the sample deviation rate
plus the allowance for sampling risk exceeds the tolerable rate.

17. An entity's internal control system requires that for every check request there be an
approved voucher, supported by a prenumbered purchase order and a prenumbered
receiving report. To determine whether checks are being issued for unauthorized
expenditures, an auditor most likely would select items for testing from the population of
all
a. purchase orders.
b. canceled checks.
c. receiving reports.
d. approved vouchers.

18. In planning a statistical sample for a test of controls, an auditor increased the
expected population deviation rate from the prior year's rate because of the results of
the prior year's tests of controls and the overall control environment. The auditor most
likely would then increase the planned
a. tolerable rate.
b. allowance for sampling risk.
c. risk of assessing control risk too low.
d. sample size.
19. As a result of tests of controls, an auditor assessed control risk too low and
decreased substantive testing. This assessment occurred because the true deviation
rate in the population was
a. more than the risk of assessing control risk too low, based on the auditor's sample.
b. more than the deviation rate in the auditor's sample.
c. less than the risk of assessing control risk too low, based on the auditor's sample.
d. less than the deviation rate in the auditor's sample.

20. In performing tests of controls over authorization of cash disbursements, which of

the following statistical sampling methods would be most appropriate?
a. variables.
b. stratified.
c. ratio.
d. attribute.

21. As a result of sampling procedures applied as tests of controls, an auditor incorrectly

assessed control risk lower than appropriate. The most likely explanation for this
situation is that
a. the deviation rates of both the auditor's sample and the population exceed the
tolerable rate.
b. the deviation rates of both the auditor's sample and the population are less than the
tolerable rate.
c. 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.
d. the deviation rate in the auditor's sample exceeds the tolerable rare but the deviation
rate in the population is less than the tolerable rate.

CHAPTER 17

1. Zashi considered the sample size needed for a selection of customers' accounts receivable
for the substantive audit of the total accounts receivable. She presented the following
information for two alternative cases: (insert table)
Zashi should expect the sample size for Case 0 to be:
a. smaller than the sample size for Case R.
b. larger than the sample size for Case R.
c. the same as the sample size for Case R.
d. not determinable relative to the Case R sample size.
2. When calculating the total amount of misstatement relevant to the analysis of an account
balance, an auditor should add to the misstatement discovered in individually significant items
the following:
a. the projected likely misstatement and the additional possible misstatement estimate.
b. the known misstatement in the sampled items.
c. the known misstatement in the sampled items, the projected likely misstatement, and the
additional possible misstatement estimate.
d. the additional possible misstatement estimate.

3. Eddie audited the Mary Company's inventory on a sample basis. He audited 120 items from
an inventory compilation list and discovered net overstatement of P480. The audited items had
a book (recorded) value or P48,000. There were 1,200 inventory items listed, and the total
inventory book amount was P490,000. Which of these calculations is (are) correct?
a. Known misstatement of P4,800 using the difference method.
b. Projected likely misstatement of P480 using the ratio method.
c. Projected likely misstatement of P4,900 using the ratio method.
d. Projected likely misstatement of P4,800 using the difference method.

4. Soni Corpuz audited the client's accounts receivable, but he could not get any good
information about customer #102's balance. The customer responded to the confirmation
saying, "Our system does not provide detail for such a response." The sales invoice and
shipping document papers have been lost, and the customer has not yet paid. Soni should:
a. get another customer's account to consider in the sample.
b. treat customer 102's account as being entirely wrong (overstated), if doing so will not affect
his audit conclusion about the receivables taken altogether.
c. require adjustment of the receivables to write off customer 102's balance.
d. treat customer 102's account as accurate because there is no evidence saying it is fictitious.

5. When making a sample-based decision about the peso amount in an account balance, the
incorrect acceptance decision error is considered more serious than the incorrect rejection
decision error because:
a. the incorrect rejection decision impairs the efficiency of the audit.
b. auditors will do additional work and discover the error of the incorrect decision.
c. the incorrect acceptance decision impairs the effectiveness of the audit.
d. sufficient, competent evidence will not have been obtained.

6. "Overauditing" can defined as

a. auditing too small a sample size.
b. auditing a larger sample size than necessary.
c. taking more risk than is professionally acceptable.
d. giving an inappropriate unqualified report on financial statements.

7. Fran Marcelo audited the P4.5 million book value accounts receivable of Sporty Corporation.
In his sample of 472 of the customer accounts, for which the book value total was P500,000, he
found P17,500 overstatement. The projected likely misstatement for this sample is:
a. P148,305.
b. PI57,500.
C. P1,059.
d. P9,534.4

8. Statistical sampling provides a technique for

a. exactly defining materiality.
b. greatly reducing the amount of substantive testing.
c. eliminating judgment in testing.
d. measuring the sufficiency of evidential matter.

9. The theoretical distribution of means from all possible samples of a given size is a normal
distribution, and this distribution is the basis for statistical sampling. Which of the following
statements is not true with respect to the sampling distribution of sample means?
a. Approximately 68% of the sample means will be within one standard deviation of the mean
for the normal distribution.
b. The distribution is defined in terms of its mean and its standard error of the mean.
c. An auditor can be approximately 95% confident that the mean for a sample is within two
standard deviations of the population mean.
d. The items drawn in an auditor's sample will have a normal distribution.

10. In the application of statistical techniques to the estimation of peso amounts, a preliminary
sample usually is taken primarily for the purpose of estimating the population
a. variability.
b. mode.
c. range.
d. median.

11. Which of the following would be designed to estimate a numerical measurement of a

population, such as a peso value?
a. Sampling for variables,
b. Sampling for attributes.
c. Discovery sampling.
d. Numerical sampling.

12. When planning a sample for a substantive test of details, an auditor should consider
tolerable misstatement for the sample. This consideration should
a. be related to the auditor's assessment of inherent risk.
b. not be adjusted for qualitative factors.
c. be related to preliminary judgments about materiality levels.
d. not be changed during the audit process.

13. While performing a substantive test of details during an audit, the auditor determined that
the sample results supported the conclusion that the recorded account balance was materially
misstated. It was, in fact, not materially misstated. This situation illustrates the risk of
a. incorrect rejection.
b. incorrect acceptance.
c. assessing control risk too low.
d. assessing control risk too high.

14. When using classical variables sampling for estimation, an auditor normally evaluates the
sampling results by calculating the possible error in either direction. This statistical concept is
known as
a. precision.
b. reliability.
c. projected error.
d. standard deviation.

15. In a probability proportional to size sample with a sampling interval of P10,000, an auditor
discovered that a selected account receivable with a recorded amount of P5,000 had an audit
amount of P2,000. The projected error of this sample was
a. P3,000.
b. P4,000
c. P6,000.
d. P8,000.

16. A sampling method that can be used to estimate overstatement error of an account balance
but is not based on normal-curve mathematics is:
a. discovery sampling.
b. mean per unit sampling.
c. attributes sampling.
d. probability proportional to size sampling.

17. Which of the following sampling methods would be used to estimate a numerical value
measurement-of a population, such as a peso value?
a. Discovery sampling.
b. Numerical sampling
c. Sampling for attributes.
d. Sampling for variables.

.
18. In a probability proportional to size sample with a sampling interval of P5,000, an auditor
discovered that a selected account receivable with a recorded amount of P10,000 had an audit
amount of P8,000. If this were the only error discovered by the auditor, the projected error of this
sample would be
a. P1,000.
b. P2,000.
c. P4,000.
d. P5,000.

19. Which of the following most likely would be an advantage in using classical variables
sampling rather than probability proportional to size (PPS) sampling?
a. An estimate of the standard deviation of the population's recorded amounts is not required.
b. The auditor rarely needs the assistance of a computer program to design an efficient sample.
c. Inclusion of zero and negative balances generally does not require special design
considerations.
d. Any amount that is individually significant is automatically identified and selected.

20. Which of the following courses of action would an auditor be most likely to follow in planning
a sample of cash disbursements if the auditor were aware of several unusually large cash
disbursements?
a. Increase the sample size to reduce the effect of the unusually large disbursements.
b. Continue to draw new samples until all the unusually large disbursements appeared in the
sample.
c. Set the tolerable rate of deviation at a lower level than originally planned.
d. Stratify the cash disbursements population so that the unusually large disbursements were
selected.

CHAPTER 18

1. Which of the following does not affect the form and content of working papers?
a. Nature and complexity of the business
b. Form of the auditor's report
c. Specific audit methodology and technology used in the course of the audit.
d. Estimated audit fee agreed upon between the client and the auditor

2. Which of the following need not be documented in the working papers as required by PSA
230?
a. Audit evidence obtained, the audit procedures applied and the testing performed have
provided sufficient competent evidential matter to afford a reasonable basis for an opinion.
b. The work has been adequately planned and supervised.
c. A sufficient understanding of the internal control structure had been obtained to plan the audit
and to determine the nature, timing and extent of tests to be performed.
d. Basis in choosing the members of the audit engagement team.

3. When planning an audit, which of the following is not a factor that affects auditors' decisions
about the quantity, type, and content of audit working papers?
a. The auditors' need to document compliance with financial reporting standards.
b. The existence of new sales contracts important for the client's business.
c. The auditors' judgment about their independence with regard to the client.
d. The auditors' judgments about materiality.

4. An audit working paper that shows the detailed evidence and procedures regarding the
balance in the accumulated depreciation account for the year under audit will be found in the:
a. Current file evidence working papers.
b Permanent file working papers.
c. Administrative working papers in the current file.
d. Planning memorandum in the current file.

5. The audit working paper that reflects the major components of an amount reported in the
financial statements is the
a. interbank transfer schedule.
b. carryforward schedule.
c. supporting schedule.
d. lead schedule.

6. The current file of the auditor's working papers generally should include
a. a flowchart of the internal controls.
b. organization charts.
c. a copy of the financial statements.
d. copies of bond and note indentures.

7. Working papers that record the procedures used by the auditor to gather evidence should be
a. considered the primary support for the financial statements being examined.
b. viewed as the connecting link between the books of account and the financial statements.
c. designed to meet the circumstances of the particular engagement.
d. destroyed when the audited entity ceases to be a client.

8. The primary reason auditors cross-index their working papers is to

a. give the working papers of a professional appearance.
b. explain the use of tick marks.
c. provide an explanation of the audit steps performed.
d. provide a trail for the auditor and the reviewer.

9. When reviewing working papers, an audit supervisor will be concerned primarily with
determining whether the
a. audit programs have been carried out without deviation.
b. working papers adequately support the audit findings, conclusions, and reports.
c. working papers reflect adherence to budget constraints.
d. auditing department's standard formats and tick marks have been used consistently.

10. Which of the following is required documentation in an audit in accordance with Standards
on Auditing?
a. A flowchart or narrative of the accounting system describing the recording and classification
of transactions for financial reporting.
b. An audit program setting forth in detail the procedures necessary to accomplish the
engagement's objectives.
c. A planning memorandum establishing the timing of the audit procedures and coordinating the
assistance of entity personnel.
d. An internal control questionnaire identifying policies and procedures that ensure the
achievement of specific objectives.

11. Which of the following is not a factor that affects the independent auditors judgment as to the
quality, type, and content of working papers?
a. The timing and the number of personnel to be assigned to the engagement.
b. The nature of the financial statements, schedules, or other information upon which the auditor
is reporting.
c. The need for supervision of the engagement.
d. The nature of the auditors', report.
12. Audit working papers should be:
a. kept on the client's premises to allow client access to them for reference purposes.
b. the primary support for the financial statements being examined.
c. considered as part of the client's accounting records that is retained by the auditors.
d. designed to meet the circumstances and the auditors' needs on each engagement.

13. A primary purpose of the audit working papers is to:

a. aid the auditors in adequately planning their work.
b. provide a point of reference for future audit engagements.
c. support the underlying concepts included in the preparation of the basic financial statements.
d. support the auditors' opinion.

14. An auditor should examine the minutes of board of directors' meetings:

a. through the date of the financial statements.
b. through the date of the audit report.
c. on a test basis.
d. only at the beginning of the audit.

15. A different opinion concerning accounting and auditing matters relative to a particular phase
of the audit arises between an assistant auditor and the auditor responsible for the engagement.
After appropriate consultation, the assistant auditor asks to be disassociated from the resolution
of the matter. The working papers would probably:
a. remain silent on the matter since it is an internal matter of the auditing firm.
b. note that the assistant auditor is completely dissociated from responsibility for the auditor's
opinion.
c. document the additional work required, since all disagreements of this type will require
expanded substantive testing.
d. document the assistant auditor's position and how the difference of opinion was resolved.

16. Which of the following statements most accurately summarizes the auditor's responsibility
for reviewing the client's correspondence files?
a. The auditor should review all correspondence for items relevant to the audit.
b. The auditor should not review any correspondence, to do so would waste time more
productively spent on gathering other evidence.
c. The auditor should apply statistical selection techniques to draw a random sample of
correspondence for review.
d. The auditor should review correspondence with banks, other lending institutions, attorneys,
and governmental agencies.
17. Which of the following would not be included in the auditor's working papers?
a. A time budget for the various audit areas.
b. The results of the preceding year's audit.
c. Descriptive information about the internal control structure
d. The accounting manual

18. The working papers are

a. the property of client.
b. property of the auditor although prepared by client.
c. the primary means of documenting that an adequate audit was conducted in accordance with
Standards on Auditing.
d. used primarily as a basis for the partners to review and reward the work of the managers
seniors, and staff.

19. Permanent files contain all the data

a. about the most recent audits.
b. about the current audit and financial statements.
c. of a historical or continuing nature pertinent to the current audit.
d. of a historical or continuing nature about the client.

20. Which of the following items would not normally be included, in whole or in part, in the
auditor's permanent file on a client?
a. The articles of incorporation and by-laws.
b. Analyses of accounts such as long-term debt and stockholders equity.
c. Organization charts and internal control questionnaires.
d. The audit program.

21. An example of a reclassification of entry would be an entry

a. to reduce inventory when client failed to write down its obsolete, raw materials.
b. to change material credit balances in accounts receivable accounts to accounts payable
accounts.
c. to increase the allowance for doubtful accounts when it was discovered that a customer had
filed for bankruptcy protection
d. to increase the income tax liability account when it was discovered that client would be in a
higher tax bracket than originally estimated.

22. Reclassification entries are recorded in the

a. sales journal.
b. cash receipts journal.
c. general journal.
d. financial statements but not in the general ledger.

23. The largest portion of the auditor's working papers are tie
a. supporting schedules.
b. adjusting and reclassification entries.
c. lead schedules.
d. working trial balance.

24. An analysis schedule is designed to show the activity in

a. a statement of financial position account at the end of the period under audit.
b. a statement of financial position account during the entire period under audit, tying together
the beginning and ending balances
c. an income statement account at the end of the period under audit.
d. an income statement account during the entire period under audit, tying together the
beginning and ending balances.

25. The working papers prepared during the engagement are the property of
a. the auditor, but do not include the working papers prepared by client for the auditor.
b. the auditor, even including those prepared by client for auditor.
c. the client.
d. the auditor and client jointly.

26. Ordinarily, the working papers cannot be provided to someone else without the express
permission of the client unless
a. the papers are subpoenaed by a court.
b. the papers are used as part of a PICPA quality review program.
c. the papers are requested as evidence in a PICPA Trial Board hearing.
d. the papers are transferred as a result of a CPA selling his/her practice to another CPA firm.

27. Which of the following eliminates voluminous details from the auditor's working trial balance
by classifying and summarizing similar or related items?
a. Account analyses.
b. Supporting schedules.
c. Control accounts.
d. Lead schedules.
28. The current file of the auditor's working papers generally should include
a. a flowchart of the internal controls.
b. organization charts.
c. a copy of the financial statements.
d. copies of the bond and note indentures.

29. The permanent section of the auditor's working papers generally should include
a. time and expense reports.
b. names and addresses of all audit staff personnel on the engagement.
c. a copy of key customer confirmations.
d. a copy of the engagement letter.

30. Working papers that record the procedures used by the auditor to gather evidence should be
a. considered the primary support for the financial statements being examined.
b. viewed as the connecting link between the books of account and the financial statements
c. designed to meet the circumstances of the particular engagement.
d. destroyed when the audited entity ceases to be a client.

31. A written understanding between the auditor and the client concerning the auditor's
responsibility for the discovery of illegal acts is usually set forth in a(an)
a. client representation letter.
b. letter of audit inquiry.
c. management letter.
d. engagement letter.

32. The permanent tile section of the working papers that is kept for each audit client most likely
contains
a. review notes pertaining to questions and comments regarding the audit work performed.
b. a schedule of time spent on the engagement by each individual auditor.
c. correspondence with the client's legal counsel concerning pending litigation.
d. narrative description of the client's internal control structure.

CHAPTER 20

1. Which of the following is a required condition for a contingent liability to exist?

a. There is a potential liability to an employee of the client.
b. The amount of the future payment is known.
c. The liability resulted from an existing condition.
d. The outcome has been resolved by a current event.

2. If the amount of a probable loss on a contingent liability cannot be reasonably estimated, the
liability should be
a. accrued-and indicated in the body of the financial statements.
b. disclosed in footnotes, but not accrued.
c. neither accrued nor disclosed in footnotes.
d. disclosed in the auditor's report but not disclosed on the financial statements.

3. If a potential loss on a contingent liability is probable and the amount of the loss can be
reasonably estimated, the liability should be
a. accrued and indicated in the body of the financial statements.
b. disclosed in footnotes, but not accrued.
c. neither accrued nor disclosed in footnotes.
d. disclosed in the auditor's report but not disclosed on the financial statements.

4. The client's fiscal period ends 12/31/X3 and the auditors field work will be completed on
3/15/X4. If contingent liabilities are verified separately by the auditor, rather than as an integral
part of the various segments of the engagement, these tests for contingencies would be
performed
a. as early as possible, perhaps even with the interim work performed on 9/30/X3.
b. shortly before year-end, between 12/15/X3 and 12/31/X3.
c. well before the last few days of completing the engagement, between 2/15/X4 and 3/1/X4.
d. as close to the end of the field work as possible, but no earlier than 3/14/X4 or 3/15/X4.

5. Which of the following is not an audit procedure that is commonly used to search for
contingent liabilities?
a. Inquiries of management (orally and in writing).
b. Review the minutes of directors' and stockholders' meetings.
c. Analyze legal expense for the period under audit.
d. Review the current year's tax return.

6. At the completion of the audit, management is asked to make a written statement that it is not
aware of any undisclosed contingent liabilities. This statement would appear in the
a. management letter.
b. letter of representation.
c. letter of inquiry.
d. letters testamentary.
7. If an attorney refuses to provide the auditor with information that is within the attorney's
jurisdiction and may directly affect the fair presentation of financial statements about material
existing lawsuits (asserted claims) or unasserted claims, the audit report would have to be
a. an adverse opinion.
b. a qualified opinion.
c. an unqualified opinion with an explanatory paragraph.
d. modified to reflect the lack of available evidence.

8. Which of the following items would ordinarily not be included in standard letter of confirmation
from the client's attorney?
a. A list, prepared by management, of pending threatened litigation of material amounts.
b. A request that the attorney furnish information or comment about the likelihood of an
unfavorable outcome of litigation.
c. A request that the' attorney furnish an estimate of the amount range of the potential loss.
d. A request that the attorney confirm the amount of outstanding fees which client owes for legal
services.

9. The auditor's responsibility for "reviewing the subsequent events of a public company that is
about to issue new securities is normally limited to the period of time
a. beginning with the statement of financial position date and ending with the date of the
auditor's report.
b. beginning with the start of the fiscal year under audit and ending with the statement of
financial position date.
c. beginning with the start of the fiscal year under audit and ending with the date of the auditor's
report.
d. beginning with the statement of financial position date and ending with the date the
registration statement becomes effective.

10. Which type of subsequent event requires consideration by management and evaluation by
the auditor? financial
a. Subsequent events that have a direct effect on the financial statements and require
adjustment.
b. Subsequent events that have no direct effect on the financial statements but for which
disclosure is advisable.
c. Both a and b.
d. Neither a nor b.

11. An auditor ordinarily examines invoices from lawyers primarily in order to

a. substantiate accruals.
b. assess the legal ramifications of litigation in progress.
c. estimate the peso amount of contingent liabilities.
d. identify possible unasserted litigation, claims, and assessments.

12. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and
assessments, the auditor should.
a. honor the confidentiality of the lawyer-client relationship.
b. consider the refusal to be tantamount to a scope limitation.
c. seek to obtain the corroborating information from management.
d. disclose this fact in a note to the financial statements.

13. A client acquired 25 percent of its outstanding capital stock after year-end and prior to
completion of the auditor's field work. The auditor should
a. advise management to adjust the statement of financial position to reflect the acquisition.
b. issue pro forma financial statements giving effect to the acquisition as if it had occurred at
year-end.
c. advise management to disclose the acquisition in the notes to the financial statements.
d. disclose the acquisition in the opinion paragraph of the auditor's report.

14. An auditor issued an audit report that was dual dated for a subsequent event occurring after
the completion of field work but before the auditor's report was issued. The auditor's
responsibility for events occurring subsequent to the completion of field work was
a. limited to the specific event referenced.
b. limited to include only events occurring before the date of the last subsequent event
referenced.
c. extended to subsequent events occurring through the date of issuance of the report.
d. extended to include all events occurring since the completion of field work.

15. Which of the following procedures is most likely to assist an auditor in identifying conditions
and events that may indicate substantial doubt about an entity's ability to continue as a going
concern?
a. Inspecting title documents to verify whether any assets are pledged as collateral.
b. Confirming with third parties the details of arrangements to maintain financial support,
C. Reconciling the cash balance per books with the cutoff bank statement and the bank
confirmation.
d. Comparing the entity's depreciation and asset capitalization policies to those of other entities
in the industry.
16. The following events all occurred after the statement of financial position date (6/30/X3) but
prior to the auditor's report (9/10/X3). Which one would require an adjustment to the account
balances as of 6/30/X3?
a. Client will market a new series of equity securities (P2 million of preferred stock) on 8/1/X3.
b. Unused equipment on the books at 6/30/X3 for P100,000 was disposed of 7/31/X3 for
P60,000.
c. Securities costing P30,000 held for temporary investment on 6/30/X3 declined in value by
one-third when the market took a plunge on 8/15/X3
d. Inventory valued at P100,000 on 6/30/X3 was destroyed in a fire on 8/1/X3.

17. The audit procedures for the subsequent events review can be divided into two categories:
(1) procedures normally integrated as a part of the verification of year-end account balances,
and (2) those performed specifically for the purpose of discovering subsequent events. Which of
the following procedures are in category 2?
a. Subsequent-period sales and purchases transactions are examined to determine whether the
cutoff is accurate.
b. Correspond with attorneys.
c. Test the collectability of accounts receivable by reviewing subsequent period cash receipts.
d. Compare the subsequent period purchase price of inventory with the recorded cost as a test
of lower-of-cost-or-market valuation.

18. The concept of "dual dating" on the auditor's report refers to

a. the client's date on the statements (12/31/X3) and the auditor's date on the report (3/30/X4).
b. the auditor's date on the report (3/30/X4) and the review required when client files a
registration statement with the SEC (5/30/X4).
c. the auditor's date on the report representing the end of the field work (3/30/X4) and the review
of an important event that occurred after the completion of field work (4/5/X4) but before the
auditor's report was delivered.
d. the wording problem created because some of client's statements are for a period of time (for
year ended 12/31/X3) and others are for one specific date (12/31/X3).

19. During the final review of working papers and financial statements, it is common to have the
analytical procedures done by a
a. partner.
b. manager.
c. senior.
d. staff member.

20. Auditing standard requires the auditor to evaluate whether there is a substantial doubt
about a client's ability to continue as a going concern for at least one year beyond the statement
of financial position date. One of the most important types of evidence to assess the going
concern question is
a. statistical sampling procedures.
b. analytical procedures.
c. inquiries of client and their legal counsel.
d. confirmations of creditors.

21. Which of the following statements regarding the letter of representation is not correct?
a. It is prepared on the client's letterhead.
b. It is addressed to the CPA firm.
c. It is signed by high-level corporate officials, usually the president and chief financial officer.
d. It is optional, not required, that the auditor obtain such a letter from management.

22. Refusal by a client to prepare and sign the representation letter would require a(n)
a. qualified opinion or disclaimer.
b. adverse opinion or a disclaimer.
c. qualified or an adverse opinion.
d. unqualified opinion with an explanatory paragraph.

23. If, after the accumulation of final evidence and during the evaluation of results, the auditor
concludes that sufficient evidence has not been obtained to draw a conclusion about fairness of
the client's representations, there are two choices:
a. (1) obtain additional evidence, or (2) issue a qualified opinion or a disclaimer
b. (1) issue a qualified opinion, or (2) issue a disclaimer.
c. (1) issue a disclaimer, or (2) withdraw from the engagement.
d. (1) obtain additional information, or (2) issue an adverse opinion.

24. There are often a large number of immaterial errors discovered that do not require an
adjustment at the time of they are found.
a. Since these items are individually immaterial, the auditor would not recommend adjusting
entries to client.
b. Since there are a large number of these, the auditor would recommend adjusting entries to
client.
c. The auditor must combine the individually immaterial errors and evaluate whether the
combined amount is material.
d. The auditor would never combine these individually immaterial amounts because that would
mix apples and oranges.
25. Which of the following is not one of the three main reasons why it is essential that working
papers be thoroughly reviewed by another member of the audit firm at the completion of the
audit?
a. To evaluate the accuracy of the auditing firm's time budget for this engagement.
b. To evaluate the performance of inexperienced personnel.
c. To make sure that the audit meets the CPA firm's standard of performance.
d. To counteract the bias that frequently enters into the auditor's judgment.

26. After issuing a report, an auditor has no obligation to make continuing inquiries or perform
other procedures concerning the audited financial statements, unless
a. information that existed at the report date and may affect the report comes to the auditor's
attention.
b. management of the entity requests the auditor to reissue the auditor's report.
c. information about an event that occurred after the end of field work comes to the auditor's
attention.
d. final determination or resolutions are made of contingencies that had been disclosed in the
financial statements.

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

28. An auditor has concluded that an audit procedure considered necessary the time of the
examination was omitted. The auditor should assess importance of the omitted procedure to his
or her ability to support the previously expressed opinion. Which of the following would be least
helpful in making that assessment?
a. A discussion with the client about whether persons are relying on the auditor's report.
b. A reevaluation of the overall scope of the examination.
c. A discussion of the circumstances with engagement personnel.
d. A review of the other audit procedures that were applied and that might compensate for the
one omitted.

29. The independent auditors for Lee, Inc., a publicly held company, concluded that their
omission of an audit procedure considered necessary at the time of the examination impairs
their present ability to support the previously expressed opinion. If they believe persons are
currently relying on the report, they should promptly
a. undertake to apply the omitted procedure or alternative procedures that would provide a
satisfactory basis for the opinion.
b. notify the board of directors that the previously expressed opinion is not to be relied on.
c. notify the stockholders currently relying on the report that the previously expressed opinion is
not to be relied on.
d. notify the Securities and Exchange Commission that the previously expressed opinion is not
to be, relied on.

30. Assume the following events occurred after the issuance of an auditors report. Which would
be most likely to cause the auditor to make further inquiries about the previously issued financial
statements?
a. An uninsured natural disaster occurs, and it may affect the entity's ability to continue as a
going concern.
b. The entity has resolved a contingency that was disclosed in its audited financial statements.
c. The auditor has learned new information concerning undisclosed lease transactions during
the audited period.
d. The entity has sold a subsidiary that accounted for 25 percent of its consolidated net income.

31. If the auditor becomes aware after the audited financial statements have been released that
some information included in the statements is materially misleading, he or she has
a. no obligation to disclose it since the he or she acted in good faith and
b. without negligence in arriving at the audit opinion.
c. an obligation to inform the board of directors of the misleading statements.
d. an obligation to inform all users who are relying on the financial statements are informed.

32. If the auditor becomes aware after the audited financial statements have been issued that
some information included in the statements is materially misleading, the auditor's first and most
desirable approach is to
a. inform the Securities and Exchange Commission and other regulatory agencies.
b. inform the users of the misleading statements.
c. request that the client issue an immediate revision of the financial statements containing an
explanation of the reasons for the revision.
d. do all three of the above.

33. After an auditor has issued an audit report on a nonpublic entity, there is no obligation to
make any further audit tests or inquiries with respect to the audited financial statements covered
by that report unless
a. new information comes to the auditor's attention concerning an event which occurred prior to
the date of the auditor's report which may have affected the auditor's report.
b. material adverse events occur after the date of the auditor's report.
c. final determination or resolution was made on matters which had resulted in a qualification in
the auditor's report.
d. final determination or resolution was made of a contingency which had been disclosed in the
financial statements.

CHAPTER 21

1. The auditors' report should be dated as of the date the:

a. Report is delivered to the client.
b. Auditors have accumulated sufficient evidence.
c. Fiscal period under audit ends.
d. Review of the working papers is completed.

2. The existence of audit risk is recognized by the statement in the auditor's standard report that
the auditor
a. obtains reasonable assurance about whether the financial statements are free of material
misstatement.
b. assesses the accounting principles used and also evaluates the overall financial statement
presentation.
c. realizes that some matters, either individually, or in the aggregate, are important, while other
matters are not important.
d. is responsible for expressing an opinion on the financial statements which are the
responsibility of management.

3. For an entity's financial statements to be presented fairly in conformity with the requirements
of the applicable financial reporting framework, which of the following need not be complied
with?
a. The financial statements adequately disclose the significant accounting policies selected and
applied.
b. The financial statements should present information that is relevant, reliable, comparable,
and understandable.
c. The financial statements should use appropriate terminology.
d. The financial statements should use principles approved by the Auditing and Assurance
Standards Council.

4. The introductory paragraph of the standard audit report states that the financial statements
and the opinion expressed about those statements are
a. the responsibility of the auditor.
b. the responsibility of management.
c. the joint responsibility' of management and the auditor.
d. none of the above.

5. The scope paragraph of the standard unqualified report states that the audit is designed to
a. discover all errors and/or irregularities.
b. discover material errors and/or irregularities.
c. obtain reasonable assurance whether the statements are free of material misstatement.
d. conform to financial reporting standards.

6. In the scope paragraph of the audit report, the use of the term "reasonable assurance" is
intended to indicate that
a. no misstatements exist in the financial statements.
b. no material misstatements exist in the statements.
c. them is a possibility that material misstatements still exist in the financial statements.
d. there is a possibility that immaterial misstatements still exist in the financial statements.

7. In the scope paragraph of the audit report, the use of the term "material misstatements"
conveys that auditors are responsible to search for
a. minor misstatements.
b. significant misstatements.
c. fraudulent misstatements.
d. all misstatements.

8. The audit report date is important to users because it indicates

a. the last day of the fiscal period.
b. the date on which the financial statements were filed with the Securities and Exchange
Commission.
c. the last date on which users may institute a lawsuit against either client or auditor.
d. the last day of the auditor's responsibility for the review of significant events that occurred
after the date of the financial statements.

9. Most auditors believe that financial statements are "presented fairly" when the statements are
in accordance with financial reporting standards, but that it is also necessary to
a. determine that they are not in violation of PASs.
b. examine the substance of transactions and balances for possible misinformation.
c. review the statements using the accounting principles promulgated by the Securities and
Exchange Commission.
d. assure investors that the net income reported this year will be equaled or exceeded in the
future.

CHAPTER 22

1. A CPA developed a system for clients to enter transaction data by remote terminal
into the CPA's computer. The CPA's system processes the data and prints monthly
financial statements. When delivered to clients, these financial statements should
include:
a. a standard unmodified audit report.
b. an adverse audit report.
c. a report containing a description of the character of the auditor's examination and the
degree of responsibility he or she is taking.
d. a description of the remote terminal system and the controls for ensuring accurate
data processing

2. Under which of the following conditions can a disclaimer of opinion never be given?
a. Going-concern problems are overwhelming the company.
b. The client does not let the auditor have access to evidence about important accounts.
c. The auditor owns stock in the client corporation.
d. The auditor has found that the client has used the NIFO (next in, first out) inventory
costing method.

3. An auditor 'may reasonably issue an "except for" qualified opinion for

a(an)
Scope limitation; Unjustified accounting change
a. Yes No
b. No Yes
C. Yes Yes
d. No No

4. As a result of management's refusal to permit the auditor to physically examine

inventory, the auditor has not accumulated sufficient evidence to conclude whether
financial statements are stated in accordance with PFRS. The auditor must depart from
the unmodified audit report because
a. the financial statements have not been prepared in accordance with, PFRS.
b. the scope of the audit has been restricted by circumstances beyond either the client's
or auditor's control.
c. the auditor has lost independence.
d. the scope of the audit has been restricted.
5. Three of the following conditions would, by themselves, require the auditor to issue a
report other than an unmodified report. Which one would not require such a departure?
a. Client company's financial statements show a significant net loss for each of the last
three years, including the current fiscal period.
b. The financial statements have not been prepared in accordance with financial
reporting standards.
c. The auditor is not independent during the fiscal period under audit.
d. The scope of the auditor's examination has been restricted, although the cause of the
restriction was not the client's fault.

6. A report other than an unmodified report must be issued whenever any of the three
conditions requiring a departure from an unmodified report
a. exists.
b. exists and is material.
c. exists, is material, and is within management's control.
d. exists, is material, and is within either management's or the auditor's control

7. The necessity to issue a disclaimer of opinion may arise of

a. a severe limitation on the scope of the audit examination.
b. a non-independent relationship between auditor and client.
c. either a or b above.
d. none of the above.

8. An adverse opinion is issued when the auditor believes

a. Some parts of the financial statements are materially misstated or misleading
b. the financial statements will be found to be misleading or misstated, if an adequate
investigation is performed.
c. the overall financial statements are so materially misstated or misleading as a whole
that they do not present fairly the financial position or results of operations and cash
flows in conformity with PFRS.
d. the audit firm is not independent.

9. The adverse opinion report will be issued by the independent auditor when he/she
a. suspects that client has not followed financial reporting standards (PFRS).
b. suspects that client's financial statements are not in conformity with financial reposing
standards (PFRS).
C. has knowledge that the financial statements are not in conformity with financial
reporting standards (PFRS).
d. has knowledge that Philippine Standards on Auditing (ISAs) were not followed.

10. A disclaimer is issued whenever the auditor

a. has been unable to satisfy him/herself that the overall financial statements are
presented fairly.
b. believes that the overall financial statements are not presented fairly.
c. believes that some material part(s) of the financial statements are not presented fairly.
d. has determined that the financial statements are presented fairly.

11. Which of the following statements is true?

a. The auditor is required to issue a disclaimer of opinion in the event of a material
uncertainty.
b. The auditor is required to issue a disclaimer of opinion in the event of a going
concern problem.
c. The auditor is required to issue a disclaimer of opinion for a material uncertainty and
for a going concern problem.
d. The auditor has the option, but it is not required, to issue a disclaimer of opinion for a
material uncertainty or for a going concern problem.

12. Whenever an auditor issues a modified' report, he or she

a. must use the term "subject to" in the opinion paragraph.
b. may use either the terms "subject to" or "except for" in the opinion paragraph,
depending on the nature of the qualification.
c. must use the term "except for" in the opinion paragraph.
d. must not use the terms "subject to" or "except for" in the opinion paragraph.

13. Both disclaimer and adverse opinions are used

a. only when the condition is highly material.
a. whether the condition is material or not.
c. regardless of the auditor's independence.
d. regardless of client's choice of a non-PFRS accounting method.

14. A qualified opinion report can be used only when the auditor believes that the
overall financial statements are
a. fairly stated.
b. not fairly stated.
c. materially misstated
d. materially misleading

15. The least severe type of report for disclosing departures from an unmodified report
is the
a. adverse opinion.
b. disclaimer of opinion.
c. qualified opinion.
d. report on unaudited financial statements.

16. A modified report can not take the form of a qualification of

a. the opinion alone.
b. the scope alone.
c. both the scope and opinion.
d. all of the above.

17. In which of the following situations would an auditor ordinarily express an opinion
without an explanatory paragraph?
a. the auditor wishes to emphasize that the entity had significant related-party
transactions.
b. The auditor decides to refer to the report of another auditor as a basis, in part, for the
auditor's opinion.
c. the entity issues financial statements that present financial position and results of
operations, but it omits the statement of cash flows.
d. The auditor has substantial doubt about the entity's ability to continue as a going
concern, but the circumstances are fully disclosed ill the financial statements.

18. Although expressing an unmodified opinion, an auditor includes a separate

paragraph in the report to emphasize that the auditee had significant transactions with
related parties. This inclusion
a. violates SAs if this information is already disclosed in the footnotes.
b. necessitates a revision of the opinion paragraph to include the phrase "with foregoing
explanation."
c. is appropriate and would not negate the unmodified opinion.
d. is considered a qualification of the opinion.
19. In which of the following circumstances would an auditor most likely add an
explanatory paragraph to the standard report while expressing an unmodified opinion?
a. The auditor is asked to report on the statement of financial position but not on the
other basic financial statements.
b. There is substantial doubt about the entity's ability to continue as a going concern.
c. Management's estimates of the effects of future events are unreasonable.
d. Certain transactions cannot be tested because of management's records retention
policy.

20. The management of a client company believes that the statement of cash flows is
not a useful document and refuses to include one in the auditor's annual report to
stockholders. As a result of this circumstance, the auditor's opinion should be
a. adverse.
b. unmodified.
c. qualified due to inadequate disclosure.
d. qualified due to a scope limitation.

21. An auditor may not issue a qualified opinion when

a. a scope limitation prevents the auditor from completing an important audit procedure.
b. the auditor's report refers to the work of a specialist.
c. an accounting principle at variance with financial reporting standards is used.
d. the auditor lacks independence with respect to the audited entity.

22. An auditor was unable to obtain sufficient competent evidential matter concerning
certain transactions due to an inadequacy or the entity's accounting records. The
auditor would choose between issuing a(n)
a. qualified opinion and an unmodified opinion with an explanatory paragraph.
b. unmodified opinion with an explanatory paragraph and an adverse opinion.
c. adverse opinion and a disclaimer of opinion.
d. disclaimer of opinion and a qualified opinion.

23. In which of the following situations would a principal auditor be least likely to make
reference to another auditor who audited a subsidiary of the entity?
a. The other auditor was retained by the principal auditor and the work was performed
under the principal auditor's guidance and control.
b. The principal auditor finds it impracticable to review the other auditor's work or
otherwise be satisfied as to the other auditor's work.
c. The financial statements audited by the other auditor are material to the consolidated
financial statements covered by the principal auditor's opinion.
d. The principal auditor is unable to be satisfied as to the independence and
professional reputation of the other auditor.

24. When an auditor expresses an adverse opinion, the opinion paragraph should
include
a. the principal effects of the departure from financial reporting standards.
b. a direct reference to a separate paragraph disclosing the basis for the opinion.
c. the substantive reasons for the financial statements being misleading.
d. a description of the uncertainty or scope limitation that prevents an unmodified
opinion.