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PRTC
CHAPTER 1
3. The exposure period allowed for each exposure draft of PSA to be considered
by the organizations and persons to whom it is sent for comment is generally
a) 120 days
b) 90 days
c) 60 days
d) 180 days
Answer: B
5. An audit which has its purpose the evaluation of the economy and efficiency
with which resources are employed is known as a(n)
a) Financial audit
b) Compliance audit
c) Governmental audit
d) Operational audit
Answer: D
6. Which one of the following would be the most persuasive type of evidence?
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a) Check register
b) Bank statement
c) Observation of assets
d) Inquiry with the in-house attorney
Answer: C
11. The engagement partner should be rotated after a defined period, normally
no more than
a) 2 years
b) 3 years
c) 5 years
d) 7 years
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Answer: C
14. Which of the following types of evidence would an auditor consider to be the
least reliable for an external audit?
a) Representations in writing from the director of the audit client.
b) A sales invoice prepared by the client.
c) A sales invoice prepared by a vendor to the client.
d) A bank confirmation form signed by the client’s bank.
Answer: A
15. When making a client continuance decision, the auditor should evaluate
client based upon which of the following?
a) Client entity characteristics
b) Independence risk factors
c) Financial reporting issues
d) All of the above
Answer: D
18. Which of the following nonfinancial information would an auditor most likely
consider in performing analytical procedures during the planning phase of an
audit?
a) Turnover of personnel in the accounting department
b) Objectivity of audit committee members
c) Square footage of selling price
d) Management’s plans to repurchase stocks
Answer: C
20. Statement 1: The independent auditors or in the case of auditing firm, the
signing partner, of the regulated entities under SEC SRC Rule 68, shall be
rotated after every 5 years of engagement.
Statement 2: A two-year cooling off period shall be observed in the re-
engagement of the signing partner or individual auditor who was rotated.
a.)True, true
b.)True, false
c.)False, true
d.)False, false
Answer: A
CHAPTER 2
1. What is the primary determinate in the difference between fraud and error
a. The materiality of the misstatement
b. The intent to deceive
c. The level of management involved
d. The type of transaction effected
Answer: B
2. The following are examples of error, except
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a. A mistake from gathering or processing data from which financial
statements are prepared
b. An incorrect accounting estimate arising from oversight or
misinterpretation of facts
c. A mistake in the application of accounting principles relating to
measurement, recognition, classification, presentation or disclosure
d. Misrepresentation in the financial statements of events, transactions,
or other significant information
Answer: D
5. The two types of fraud of intentional misstatements that are relevant to the
auditor’s consideration of fraud include, misstatements resulting from
fraudulent financial reporting and misstatements resulting from
misappropriation of assets. Fraudulent financial reporting least likely involve
a. Deception such as manipulation, falsification (including forgery), or
alteration of accounting records or supporting documents from which
the financial statements are prepared
b. Misrepresentation in, or intentional omission from, the financial
statement events, transaction or significant information
c. Intentional misapplication of accounting principles relating to
measurement, recognition, classification, presentation or disclosure
d. Embezzling receipts, stealing physical assets or intellectual property,
causing an entity to pay for goods and services not received, or using
an entity’s assets for personal use.
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Answer: D
6. Which statement is incorrect regarding the auditor’s consideration of laws
and regulations in an audit of financial statements?
a. Noncompliance refers to acts of omission or commission by the entity
being audited which are contrary to prevailing laws and regulations
b. Noncompliance includes transactions entered into by, or in the name
of, the entity, or on its behalf, by TCWG, management or employees
c. Noncompliance includes personal misconduct of the entity’s
management or employees though they are unrelated to the entity’s
business activities
d. In the absence of evidence to the contrary, the auditor is entitled to
assume the entity is in compliance with applicable laws and
regulations affecting the client
Answer: C
8. Which of the following is the auditor least likely to do when aware of an illegal
act?
a. Discuss the matter with the client’s legal counsel.
b. Obtain evidence about the potential effect of the illegal act on the
financial statements.
c. Contact the local law enforcement office regarding potential criminal
wrongdoing.
d. Consider the impact of the illegal act and its relationship with the
company’s management.
Answer: C
9. Based on PSA 240 redrafted, in a financial statement audit, the auditor should
consider categories of fraud risk factors relating to misstatements arising
from (1) fraudulent financial reporting and (2) misappropriation of assets.
Which of the following is not a category of fraud risk factors in relation to
misstatements arising from misappropriation of assests?
a. Opportunities
b. Pressure/incentives
c. Attitudes/rationalization
d. Controls
Answer: D
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10.The following are examples of circumstances that may indicate the possibility
that the financial statements may contain a material misstatement resulting
from fraud, except
a. Undue time pressures imposed by management to resolve complex or
contentious issues.
b. Complaints by management about the conduct of the audit or
management intimidation of engagement team members, particularly
in connection with the auditor’s critical assessment of the audit
evidence or in the resolution of potential disagreements with
management.
c. Usual delays by the entity in providing requested information
d. An unwillingness to address identified weaknesses in internal control
on a timely basis.
Answer: C
11.Which of the following best describes what is meant by the term “fraud risk
factors”?
a. Factors whose presence indicates that the risk of fraud is high
b. Factors whose presence often has been observed in circumstances
where frauds have occurred
c. Factors whose presence requires modifications of planned audit
procedures
d. Reportable conditions identified during an audit
Answer: B
12.The following are examples of circumstances that may indicate the possibility
that the financial statements may contain a material misstatement resulting
from fraud, except
a. Unwillingness by management to permit the auditor to meet privately
with those charge with governance.
b. Accounting policies that appear to be consistent with industry norms.
c. Frequent changes in accounting estimates that do not appear to result
from changed circumstances
d. Tolerance of violations of the entity’s Code of Conduct
Answer: B
13.The primary responsible for the prevention and detection of fraud and error
rests with
a. The auditor
b. Those charged with governance
c. The management of an entity
d. Both b and c
Answer: D
14.In comparing management fraud with employee fraud, the auditor’s risk of
failing to discover the fraud is
a. Greater for employee fraud because of the higher crime rate among
blue collar workers
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b. Greater for management fraud because of management’s ability to
override existing internal controls, which is always assumed in audit.
c. Greater for employee fraud because of the larger number of
employees in the organization
d. Greater for management fraud because management are inherently
smarter than employees
Answer: B
15.The following are examples of circumstances that may indicate the possibility
that the financial statements may contain a material misstatement resulting
from fraud, except
a. Transactions that are recorded in a complete or timely manner or are
properly recorded as to amount, accounting period, classification, or
entity policy.
b. Unsupported or unauthorized balances or transactions.
c. Last minute adjustments that significantly affect financial results.
d. Tips or complaints to the auditor about alleged fraud.
Answer: A
16.The following are examples of circumstances that may indicate the possibility
that the financial statements may contain a material misstatement resulting
from fraud, except
a. Missing documents.
b. Documents that appear to have been altered.
c. Unavailability of other than photocopied or electronically transmitted
documents when documents in original form are expected to exist.
d. Significant explained items on reconciliations.
Answer: D
20.Examples of the type of information that may come to the auditor’s attention
that may indicate that noncompliance with laws or regulations has occurred
least likely include
a. Payments for unspecified services or loans to consultants, related
parties, employees or government employees
b. Payments for goods or services made other than to the country from
which the goods or services originated.
c. Unauthorized transactions or improperly recorded transactions.
d. Payments with proper exchange control documentation.
Answer: D
CHAPTER 3
8) Which of the following would require auditing through the computer rather
than auditing around the computer?
a) These are small volumes of input/output data
b) The internal controls are not embedded in the computer system
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c) The system is complex and includes key parts of the accounting
system
d) The system was audited with computer-assisted audit techniques
(CAATs) in the previous years, revenue from the award credits is
recognized at the point of sale
Answer: C
10) Controls that enhance the reliability of the financial statements may be
classified as prevention controls and detection controls. Which of the
following is primarily a detection control?
a) Separation of duties between recording cash receipts and depositing
cash
b) Bank accounts are reconciled monthly by persons independent of cash
recording and cash custody
c) The human resources department authorizes the hiring of only those
persons for accounting positions that meet the written job
requirements specified by the corporate controller
d) An accounting manual, accompanied by a detailed chart of accounts,
carefully and clearly describes each of type of transaction affecting the
entity
Answer: B
12) An auditor obtains evidence of the internal control over the accounting
system by all of the following except:
a) Walkthroughs of the accounting system.
b) Making inquiries of banks and attorneys.
c) Reviewing system flowcharts.
d) Taking plant and operational tours.
Answer: B
16) When assessing the client, which of the following factors is considered
pervasive and creates both an attitude and culture that affects the client’s
reporting system, the process of recording transactions, the process of
making estimates and adjustments.
a) The control environment
b) Audit testing of processes and controls
c) Designs and operations of controls
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d) Inherent and control risk
Answer: A
18) Management philosophy and operating style most likely would have a
significant influence on an entity’s control environment when
a) The internal auditor reports directly to management.
b) Management is dominated by one individual.
c) Accurate management job descriptions delineate specific duties.
d) The audit committee actually overseas the financial reporting process.
Answer: B
CHAPTER 4
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1. The Code of Ethics for Professional Accountants in the Philippines is
applicable to professional services performed in the Philippines on or after
a. December 31, 2009
b. December 31, 2008
c. June 30, 2008
d. June 30, 2009
Answer: C
5. The following statements relate to the provisions of the Code of Ethics that
deal with the professional accountant’s marketing of professional services.
Which is false?
a. When a professional accountant in public practice solicits new work
through advertising or other forms of marketing, a self-interest threat
to compliance with the principle of professional behavior may be
created
b. The professional accountant should be honest and truthful when
marketing professional services
c. Advertising and publicity are generally unacceptable
d. When marketing professional services, the professional accountant
should not make exaggerated claims for services offered, qualifications
possessed or experience gained.
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Answer: C
13.There is a high risk as well as a history, that fraud is instituted through which
of the following?
a. Adjusting entries
b. Closing entries
c. Unusual entries
d. All of the above
Answer: D
CHAPTER 5
1 The principal reason for an independent auditor to gather and evaluate audit
evidence is to
a Form an opinion on the financial statements.
b Detect fraud.
c Evaluate management.
d Evaluate internal control.
Answer: A
3 Other information that the auditor may use as audit evidence least likely
includes
a Minutes of meetings.
b Confirmation from third parties.
c Information obtained by the auditor from such audit procedures as
inquiry, observation, and inspection.
d Adjustments to the financial statements that are not reflected in formal
journal entries.
Answer: D
6 The form and content of audit engagement letters may vary for each client,
but they would generally include reference to the following, except:
a The objective of the audit of financial statements
b Auditor’s responsibility for the financial statements.
c The form of any reports or other communication of results of the
engagement.
d Unrestricted access to whatever records, documentation and other
information requested in connection with the audit.
Answer: B
7 If the auditor believes that an understanding with the client has not been
established, he or she should ordinarily
a Perform the audit with increased professional skepticism.
b Assess the control risk at the maximum level and perform a primarily
substantive audit.
c Decline to accept or perform the audit.
d Modify the scope of the audit to reflect an increased risk of material
misstatement due to fraud.
Answer: C
15 Which of the following will an auditor most likely discuss with the former
auditors of a potential client prior to acceptance?
a Integrity of management
b Reasons for changing audit firms
c Disagreements with management regarding accounting principles
d All of the above must be discussed
Answer: D
16 If permission from client to discuss its affairs with the proposed auditor is
denied by the client, the predecessor auditor should
a Keep silent of the denial.
b Disclose the fact that the permission to disclose is denied by the client.
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c Disclose adequately to proposed auditor all noncompliance made by
the client.
d Seek legal advice before responding to the proposed auditor.
Answer: B
19 When an auditor increases the assessed level of control risk because certain
control activities were determined to be ineffective , the auditor would most
likely increase the
a Extent of tests of controls.
b Level of detection risk.
c Extent of test of details.
d Level of inherent risk.
Answer: C
CHAPTER 6
3. Which of the following audit procedures is used extensively throughout the audit
and often is complementary to performing the audit procedures?
a) Inspection
b) Observation
c) Inquiry
d) Confirmation
Answer: C
14. Which assertion are auditors most concerned regarding the audit of asset
accounts?
a) Completeness
b) Existence
c) Accuracy
d) Proper period
Answer: B
16. The strongest criticism of the reliability of audit evidence that the auditor
physically observes is that
a) The client may conceal items from the auditor
b) The auditor may not be qualified to evaluate the items he is observing
c) Such evidence is too costly in relation to its reliability
d) The observation must occur at a specific time, which is often too difficult to
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arrange
Answer: B
17. Which of the following statements about existence (testing is from the
accounting records to the supporting audit evidence) and completeness
(testing is from the supporting evidence to the accounting records) assertions
is not true?
a) The existence and completeness assertions emphasize different audit
concerns
b) Existence deals with overstatements and completeness deals with
understatements
c) Existence deals with understatements and completeness deals with
overstatements
d) The completeness assertion deals with unrecorded transactions
Answer: C
18. Theoretically, which of the following would not have an effect on the amount
of audit evidence gathered by the auditor?
a) The type of opinion to be issued.
b) The auditor’s evaluation of internal control.
c) The types of audit evidence available to the auditor.
d) Whether or not the client reports to the Securities and Exchange
Commission.
Answer: D
CHAPTER 7
4. The following are examples of conditions and events that may indicate the
existence of risks of material misstatement, except
a. Operations in regions that are economically stable
b. Pending litigation and contingent liabilities
c. Application of new accounting pronouncements
d. High degree of complex regulation
Answer: A
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5. Which of the following conditions and events may most likely indicate the
existence of risks of material misstatements?
a. Having personnel with appropriate accounting and financial reporting
skills.
b. Accounting measurements that involve simple processes
c. Significant amount of routing or systematic transactions
d. Constraints on the availability of capital and credit
Answer: D
6. Which of the following conditions and events least likely indicate the
existence of risks of material misstatements?
a. Changes in the supply chain.
b. Expanding into new locations
c. Inquiries into the entity’s operations or financial results by regulatory
or government bodies.
d. Consistency of the entity’s IT strategy and its business strategies.
Answer: D
7. The following events and conditions indicate the existence of risks of material
misstatement, except
a. Changes in key personnel including departure of key executives.
b. Weaknesses in internal control, especially those not addressed by
management.
c. Installation of significant new IT systems related to financial reporting.
d. Operations that are subject to a low degree of complex regulation.
Answer: D
8. In exercising judgment as to which risks are significant risks, the auditor shall
consider at least the following:
I. Whether the risk is a risk of fraud
II. Whether the risk is related to recent significant economic, accounting
or other developments and, therefore, requires specific attention;
III. The complexity of transactions;
IV. Whether the risk involves significant transactions with related parties
V. The degree of subjectivity in the measurement of financial information
related to the risk, especially those measurements involving a wide
range of measurement uncertainty
VI. Whether the risk involves significant transactions that are outside the
normal course of business for the entity, or that otherwise appear to be
unusual.
a. I, II, III, and IV only
b. I, II, III, IV, and V only
c. I, II, and III only
d. I, II, III, IV, V, and VI
Answer: D
9. The auditor should design and perform further audit procedures whose
nature, timing, and extent are responsive to the assessed risks of material
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misstatement at the assertion level. Which of the following is the most
important consideration in responding to the assessed risks?
a. The nature of the audit procedures
b. The extent of the audit procedures
c. The timing of audit procedures
d. All of these are equally important
Answer: A
10.Which statement is/are correct regarding the nature, timing, and extent of
further audit procedures?
a. The nature of further audit procedures refers to their purpose and their
type
b. The timing refers to when audit procedures are performed or the
period or date to which the audit evidence applies
c. Extent includes the quantity of a specific audit procedure to be
performed.
d. All of the above
Answer: D
12.An auditor should consider two key issues when obtaining an understanding
of a client’s internal controls. These issues are:
a. The effectiveness and efficiency of controls
b. The frequency and effectiveness of the controls
c. The design and utilization of the controls
d. The implementation and efficiency
Answer: C
14.Shown below (1 through 5) are the five types of test which auditors use to
determine whether financial statements are fairly stated. Which three are
substantive tests?
1. Procedures to obtain an understanding of internal control
2. Test of controls
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3. Test of transactions
4. Analytical procedures
5. Tests of details of balances
a. 1, 2, and 3
b. 3, 4, and 5
c. 2, 3, and 5
d. 2, 3, and 4
Answer: B
15.Which of the following is not useful for obtaining an understanding of internal
controls?
a. Make inquiries of the client’s personnel.
b. Examine documents and records.
c. Read industry trade magazines.
d. Observe client activities and operations.
Answer: C
CHAPTER 8
3. The risk of incorrect acceptance and the likelihood of assessing control risk
too low relate to the:
a. Allowable risk of tolerable misstatement.
b. Preliminary estimates of materiality levels.
c. Efficiency of the audit.
d. Effectiveness of the audit.
Answer: D
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4. Which of the following factors is (are) considered in determining the sample
size for a test of controls?
Expected Tolerable
deviation rate deviation rate
a. Yes Yes
b. No No
c. No Yes
d. Yes No
Answer: A
8. The use of the ratio estimation sampling technique is most effective when:
a. The calculated audit amounts are approximately proportional to the
client's book amounts.
b. A relatively small number of differences exist in the population.
c. Estimating populations whose records consist of quantities, but not
book values.
d. Large overstatement differences and large understatement differences
exist in the population.
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Answer: A
10.The likelihood of assessing control risk too high is the risk that the sample
selected to test controls:
a. Does not support the auditor's planned assessed level of control risk
when the true operating effectiveness of internal control justifies such
an assessment.
b. Contains misstatements that could be material to the financial
statements when aggregated with misstatements in other account
balances or transactions classes.
c. Contains proportionately fewer monetary errors or deviations from
prescribed internal controls than exist in the balance or class as a
whole.
d. Does not support the tolerable error for some or all of management's
assertions.
Answer: A
12.Which of the following courses of action would an auditor most likely follow in
planning a sample of cash disbursements if the auditor is aware of several
unusually large cash disbursements?
a. Set the tolerable rate of deviation at a lower level than originally
planned.
b. Stratify the cash disbursements population so that the unusually large
disbursements are selected.
c. Increase the sample size to reduce the effect of the unusually large
disbursements.
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d. Continue to draw new samples until all the unusually large
disbursements appear in the sample.
Answer: B
13.For which of the following audit tests would an auditor most likely use
attribute sampling?
a. Making an independent estimate of the amount of a LIFO inventory.
b. Examining invoices in support of the valuation of fixed asset additions.
c. Selecting accounts receivable for confirmation of account balances.
d. Inspecting employee time cards for proper approval by supervisors.
Answer: D
17.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
1% risk of assessing control risk too low (99% confidence) that not more than
7% of the sales invoices lacked approval. The auditor estimated from
previous experience that about 2 1/2% of the sales invoices lacked approval.
A sample of 200 invoices was examined and 7 of them were lacking approval.
The auditor then determined the upper deviation rate 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 upper deviation rate (8%).
b. Expected deviation rate (7%) was more than the percentage of errors
in the sample (3.5%).
c. Upper deviation rate (8%) was more than the percentage of errors in
the sample (3.5%).
d. Expected deviation rate (2.5%) was less than the tolerable rate (7%).
Answer: A
18.An auditor examining inventory most likely would use variables sampling
rather than attributes sampling to:
a. Identify whether inventory items are properly priced.
b. Estimate whether the dollar amount of inventory is reasonable.
c. Discover whether misstatements exist in inventory records.
d. Determine whether discounts for inventory are properly recorded.
Answer: B