Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

AUDITING THEORY
Accounting 151

MULTIPLE CHOICE. Read carefully the questions below and choose the best statement among the choices.
Shade the letter corresponding to your answer on the sheet provided along with this questionnaire. Erasures are
strictly not allowed.
1. The ordinary examination of financial statements is not primarily designed to disclose
defalcations and other irregularities although their discovery may result. Normal audit
procedures are more likely to detect a fraud arising from
a. Collusion on the part of several employees.
b. Failure to record cash receipts for services rendered.
c. Forgeries on company checks.
d. Theft of inventories.

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

a. Serve as an introduction to company personnel and an authorization to examine the records.
b. Discharge the auditor from legal liability for his examination.
c. Confirm in writing management's approval of limitations on the scope of the audit.
d. Remind management of its primary responsibility for financial statements.

3. Which of the following statements is true?

a. It is usually easier for the auditor to uncover irregularities than errors.
b. It is usually easier for the auditor to uncover errors than irregularities.
c. It is usually equally difficult for the auditor to uncover errors or irregularities.
d. Usually, none of the given statements is true.

4. Generally, the decision to notify parties outside the client's organization regarding a
noncompliance with laws and regulations
a. Independent auditor.
b. Management.
c. Outside legal counsel.
d. Internal auditors.

5. An audit made in accordance with Philippine Standards on Auditing generally should

a. Be expected to provide assurance that noncompliance with laws and regulations will be
detected if the internal control is effective.
b. Be relied upon to disclose indirect-effect noncompliance with laws and regulations.
c. Encompass a plan to search actively for noncompliance with laws and regulations which relate
to operating aspects.
d. Not be relied upon to provide assurance that all noncompliance with laws and regulations will
be detected.

6. An auditor who believes that a material irregularity may exist should initially
a. Discuss the matter with those believed to be involved in the perpetration of material
irregularity.
b. Discuss the matter with a higher level of management.
c. Withdraw from the engagement.
d. Consult legal counsel.

7. When management refuses to disclose in the financial statements noncompliance to laws and
regulations which are identified by the independent auditor, the CPA may be charged with
unethical conduct for
a. Withdrawing from the engagement.
b. Issuing a disclaimer of opinion.
c. Failure to uncover the noncompliance to laws and regulations during the prior audits.
d. Reporting these activities to the audit committee.

8. A procedure in which a quality control partner periodically tests the application of quality
control procedures is most directly related to which quality control element?
a. Engagement performance
b. Independence, integrity, and objectivity
 c. Monitoring
d. Personnel management

9. The work of each assistant needs to be reviewed by personnel of at least equal competence. Which
of the following is not one of the objectives of this requirement?
a. The conclusions expressed are consistent with the result of the work performed and support
the opinion.
b. The work performed and the results obtained have been adequately documented.
c. The audit objectives have been achieved.
d. All available evidences have been obtained, evaluated and documented.

10. Which of the following is incorrect regarding the professional accountants' tax practice?
a. A professional accountant rendering professional tax services is entitled to put forward the
best position in favor of a client, or an employer.
b. Doubt may be resolved in favor of the client or the employer if there is a reasonable support
for the position.
c. A professional accountant may hold out to a client or an employer the assurance that the tax
return prepared and the tax advice offered by him are beyond challenge.
d. Professional accountants should ensure that the client or the employer is aware of the
limitations attaching to tax advice and services so that they do not misinterpret an
expression of opinion as an assertion of fact.

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

12. Which of the following statements is true when the CPA has been engaged to do an attestation
engagement?
a. The CPA firm is engaged and paid by the client; therefore, the firm has primary
responsibility to be an advocate for the client.
b. The CPA firm is engaged and paid by the client, but the primary beneficiaries of the audit
are the statement users.
c. Should a situation arise where there is no convincing authoritative standard available, and
there is a choice of actions which could impact client's financial statements either
positively or negatively, the CPA is free to endorse the choice which is best in the client's
interest.
d. As long as CPA firms are competent, it is not required that they remain unbiased.

13. When CPAs are able to maintain an independent attitude in fulfilling their responsibility, it is
referred to as independence in
a. Fact.
b. Appearance.
c. Conduct.
d. Total.
14. When determining whether independence is impaired because of an ownership interest in client
company, materiality will affect whether ownership is a violation of rule of independence
a. In all circumstances.
b. Only for direct ownership.
c. Only for indirect ownership.
d. Under no circumstances.

15. A professional accountant has a professional duty or right disclose confidential information in
each of the following, except:
a. To comply with technical standards and ethics requirements.
b. To disclose to the Bureau of Internal Revenue any fraudulent scheme committed by the client
on payment of income tax.
c. To comply with the quality review of a member body or professional body
d. To respond to an inquiry or investigation by a member body or regulatory body.

16. Which of the following best describes the passing of confidential information from a client to
its auditor? The information:
a. Should in no circumstances be conveyed to third parties.
b. Is not legally protected and can be subpoenaed by a competent court.
 c. Can only be released for peer reviews after receiving permission from the client.
d. Should be conveyed to the public if it affects the "correctness" of the financial statements.

17. A member in public practice may perform for a contingent fee any professional services for a
client for whom the member or member's firm performs
a. An audit.
b. A review.
c. A compilation used only by management.
d. An audit of prospective financial information.

18. Which one of the following contingent fee is allowed?

a. All services performed by a CPA film.
b. Non-attestation services.
c. Non-attestation services, unless the CPA firm was also performing attestation services for
the same client.
d. Attestation services.

19. When the auditor issues an erroneous opinion as a consequence of an underlying failure to comply
with the requirements of generally accepted auditing standards, it results to
a. Business failure.
b. Audit failure.
c. Audit risk.
d. All of them
20. When preparing the financial statements, it is acceptable for the auditor to prepare
a. The footnotes for client.
b. The statement for client.
c. A draft of the statements and footnotes for client.
d. A draft of the statements for client.

21. Which of the following statements best describes the auditor's responsibility regarding the
detection of material errors and frauds?
a. The auditor is responsible for the failure to detect material errors and frauds only when
such failure results from the misapplication of generally accepted accounting principles.
b. The auditor is responsible for the failure to detect material errors and frauds only when the
auditor fails to confirm receivables or observe inventories.
c. The audit should be designed to provide reasonable assurance that material errors and frauds
are detected.
d. Extended auditing procedures are required to detect unrecorded transactions even if there is
no evidence that material errors and frauds may exist.

22. The reason why an auditor accumulates evidence is to

a. Defend himself in the event of a lawsuit.
b. Justify the conclusions he has otherwise reached.
c. Satisfy the requirements of the bureau of internal revenue.
d. Enable him to reach conclusions about the fairness of the financial statements and issue an
appropriate audit report.

23. The auditor gives an audit opinion on the fair presentation of the financial statements and
associates his or her name with them when, on the basis of adequate evidence, the auditor
concludes that the financial statements are unlikely to mislead
a. A prudent user.
b. Management.
c. The reader.
d. Investors.
24. The probability that an auditor's procedures leading to the conclusion that a material error
does not exist in an account balance when, in fact, such error does exist is referred to as
a. Prevention risk.
b. Inherent risk.
c. Control risk.
d. Detection risk.

25. Which of the following is not included in an audit engagement letter?

a. Objectives of the engagement
b. Representations that the financial statements were prepared in accordance with PFRS
c. Management's responsibilities
d. A clear explanation of the services to be performed on the engagement

26. Which of the following is least likely included in an auditor’s inquiry of management while
obtaining information to identify the risks of material misstatement due to fraud?
a. Are financial reporting operations controlled by and limited to one location?
 b. Does it have knowledge of fraud or suspect fraud?
c. Does it have programs to mitigate fraud risks?
d. Has it reported to the audit committee the nature of the company's internal control?

27. Which of the following should the auditors normally interview as part of their assessment of
fraud risk?
a. Senior management
b. Audit committee
c. Various employees whose duties financial reporting responsibilities
d. Only two of the choices
e. All of the given choices

28. An audit plan is a

a. Detailed plan of analytical procedures and all substantive tests to be performed in the
course of the audit.
b. Document that provides an overview of the company and a general plan for the audit work to be
accomplished, timing of the work, and other matters of concern to the audit.
c. Generic document that auditing firms have developed to lead the process of the audit through
a systematic and logical process.
d. Budget of the time that should be necessary to complete each phase of the audit procedures.
29. If the auditor sets the preliminary judgment about materiality level at a relatively low peso
amount,
a. More evidence will be required than for a high level.
b. Less evidence will be required than for a high level.
c. The same amount of evidence will be required as for a high level.
d. The amount of evidence required will not be affected.

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

31. Which of the following is most likely to be an overall response to fraud risks identified in an
audit?
a. Supervise members of the audit team less closely and rely more upon judgment.
b. Use less predictable audit procedures.
c. Use only certified public accountants on the engagement.
d. Place increased emphasis on the audit of objective transactions rather than subjective
transactions.
32. Which of the following statements is incorrect regarding obtaining an understanding of the
entity and its environment?
a. Obtaining an understanding of the entity and its environment is an essential aspect of
performing an audit in accordance with PSAs.
b. Understanding of the entity and its environment establishes frame of reference within which
the auditor plans the audit and exercises professional judgment about assessing risks of
material misstatement in the financial statements and responding to those risks throughout
the audit.
c. The auditor's primary consideration is whether the understanding that has been obtained is
sufficient to assess the risks of material misstatement in the financial statements and to
design and perform further audit procedures.
d. The depth of the overall understanding that is required by the auditor in performing the
audit is at least equal to that possessed by management in managing the entity.
33. Inquiries directed towards those charged with governance may most likely
a. Relate to their activities concerning the design, and effectiveness of the entity's internal
control and whether management has satisfactorily responded to any findings from these
activities.
b. Help the auditor understand the environment in which the financial statements are prepared.
c. Relate to changes in the entity's marketing strategies, sales trends, or contractual
arrangements with its customers.
d. Help the auditor in evaluating the appropriateness of the selection and application of
certain accounting policies.

34. The underlying reason for a code of professional conduct for any profession is
a. That it is required by congress.
b. The need for public confidence in the quality of service of the profession.
c. That it provides a safeguard to keep unscrupulous people out.
 d. That it allows Professional Regulation Commission to have a yardstick to measure deficient
performance.
35. The auditor should determine overall responses to address the risks of material misstatement at
the financial statement level. Such responses least likely include
a. Emphasizing to the audit team the need to maintain professional skepticism in gathering and
evaluating audit evidence.
b. Assigning more experienced staff or those with special skills or using experts.
c. Incorporating additional elements of unpredictability in the selection of further audit
procedures to be performed.
d. Performing substantive procedures at an interim date instead of at period end.
36. While assessing the risk of material misstatement, the auditors identity risks, relate risk to
what could go wrong, consider the magnitude of risks and:
a. Assess the risk of misstatements due to noncompliance to laws and regulations.
b. Consider the complexity of the transactions involved.
c. Consider the likelihood that the risks could result in material misstatements.
d. Determine materiality level.
37. Which of the following is least likely considered a financial statement audit risk factor?
a. Management operating and financing decisions are dominated by top management.
b. A new client with no prior audit history.
c. Rate of change in the entity's industry is rapid.
d. Profitability of the entity relative to its industry is inconsistent.

38. Which of the following is most likely to be considered a risk factor relating to fraudulent
financial reporting?
a. Low turnover of senior management.
b. Extreme degree of competition within the industry.
c. Capital structure including various operating subsidiaries.
d. Sales goals in excess of any of the preceding three years.

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

40. Which of the following factors most likely would heighten an auditor's concern about the risk of
fraudulent financial reporting?
a. Large amounts of liquid assets that are easily convertible into cash.
b. Low growth and profitability as compared to other entity's in the same industry.
c. Financial management's participation in the initial selection of accounting principles.
d. An overly complex organizational structure involving unusual lines of authority.
41. Which of the following is correct?
a. The evidence which the auditor accumulates remains the same from audit to audit, but the
general objectives vary, depending on the circumstances.
b. The general audit objectives remain the same from audit to audit, but the evidence varies,
depending on the circumstances.
c. The circumstances may vary form audit to audit, but the evidence accumulated remains the
same.
d. The general audit objectives may vary from audit to audit, but the circumstances remain the
same.

42. The auditor is not liable to his client for

a. Negligence.
b. Bad faith.
c. Errors of judgment
d. Dishonesty.

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

44. Which of the following statements regarding quality control policies and procedures is
 incorrect?
a. Quality control policies and procedures should be implemented at both the level of the audit
firm and on an individual audits.
b. The audit firm should implement quality control policies and procedures designed to ensure
that all audits are conducted in accordance with PSAs or relevant national standards or
practices.
c. Quality control policies are objectives and goals while quality control procedures are steps
to be taken to accomplish the policies adopted.
d. The policies and procedures adopted by individual audit firms should not vary since there is
an applicable PSA that prescribes quality control policies and procedures that must be
adopted by all auditing firms.

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

a. Remind management of its primary responsibility for financial statements.
b. Serve as an introduction to company personnel and an authorization to examine the records.
c. Discharge the auditor from legal liability for his examination.
d. Confirm in writing management's approval of limitations on the scope of the audit.

46. Should the auditor uncover circumstances during the audit that may cause suspicions of
management fraud, the auditor must
a. Withdraw from engagement.
b. Issue an adverse opinion.
c. Issue a disclaimer.
d. Evaluate their implications and consider the need to modify audit evidence.

47. Most accounting and auditing professionals agree that when an audit has failed to uncover
material misstatements, and the wrong type of audit opinion is issued, the audit firm
a. Has failed to follow generally accepted auditing standards (GAAS).
b. Should be asked to defend the quality of the audit.
c. Deserves to lose the lawsuit.
d. Should not be held responsible for the financial
e. loss suffered loss suffered by others.
48. Which of the following is not likely a quality control procedure on consultation?
a. Identifies areas and specialized situations where consultation is required and encourages
personnel to consult with or in use authoritative sources on other complex matters.
b. Designates individuals as specialists to serve as authoritative sources and define their
authority in consultative situations.
c. Specifies the extent of documentation to be provided for the result of consultation in those
areas and specialized situations where consultation is required.
d. Assigns an appropriate person or persons to be responsible for assigning personnel to
audits.
49. Which of the following is an element of "directing an audit assistant" objective?
a. Identifying in advance the staffing requirements of a particular audit engagement.
b. Resolving any differences in professional judgment between audit personnel.
c. Resolution of differences in audit findings.
d. Informing assistants of their responsibilities and the objectives of the procedures they are
to perform.

50. In pursuing its quality control objectives with respect to assigning personnel to engagements, a
public accounting firm may use policies and procedures such as
a. Rotating employees from assignment to assignment on a random basis to aid in the staff
training effort.
b. Allowing staff to select the assignments of their choice to promote better client
relationships.
c. Assigning a number of employees to each engagement in excess of the number required so as
not to overburden the staff, and interfere with the quality of the audit work performed.
d. Requiring timely identification of the staffing requirements of specific engagements so that
enough qualified personnel can be made available.
51. The implementation of quality control procedures that are applicable to the individual audit
engagement is the responsibility of the
a. CPA firm.
b. Engagement quality control reviewer.
c. Expert contracted by the firm in connection with the audit engagement.
d. Engagement team.
52. Which of the following risks is entirely a quality criterion based on professional judgment?
a. Inherent risk
b. Control risk
c. Detection risk
d. Audit risk
53. The concept of materiality is not used by auditors as a guide to
a. Making decisions about the audit report
b. Planning the audit program
c. Evaluation of the audit evidence
d. Application of general standards
54. The primary deliverable of an engagement to perform based on procedures prescribed by the
intended user of the report is/are:
a. The Review Report
b. Report of Factual Findings
c. Management Letter
d. The financial statements
55. The auditor's responsibility for failure to detect fraud arises
a. Whenever the amounts involved are material.
b. When such failure clearly results from noncompliance to generally accepted auditing
standards.
c. Only when such failure clearly results from negligence so gross as to sustain an inference of
fraud on the part of the auditor.
d. Only when the examination was specifically designed to detect fraud.

56. If a CPA recklessly abandons standards of due care and diligence while performing an audit, he
or she may be held liable to unknown third parties for:
a. Gross negligence.
b. Fraudulent misconduct.
c. Gross misconduct.
d. Contributory negligence.

57. Of the following statements, which best distinguishes ordinary negligence from gross negligence?
a. The more material the undetected error the greater the likelihood of ordinary negligence.
b. Gross negligence is most probable when the auditor fails to detect errors that occurred under
conditions of strong internal control.
c. Failure to detect material errors, whether internal control is strong or weak, suggests gross
negligence.
d. Failure to exercise reasonable care denotes ordinary negligence, whereas failure to exercise
minimal care indicates gross negligence.

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

59. An auditor who believes that a material irregularity may exist should initially
a. Consult legal counsel.
b. Discuss the matter with those believed to be involved in the
perpetration of the material irregularity.
c. Discuss the matter with a higher level of management.
d. Withdraw from the engagement.

60. Which of the following statements is correct concerning the auditor's responsibility with
respect to illegal acts?
a. An auditor must design tests to detect both direct-effect and indirect-effect illegal acts.
b. An auditor must design tests to detect both immaterial and material direct-effect illegal
acts.
c. An auditor must design tests to obtain reasonable assurance of detecting material direct-
effect illegal acts.
d. An auditor must design tests to detect both material direct-effect and material indirect-
effect illegal acts.

61. If specific information comes to an auditor's attention that implies the existence of possible
illegal acts that could have a material, but indirect effect on-the financial statements, the
auditor should next
a. Report the matter to an appropriate level of management at least one level above those
involved.
b. Apply audit procedures specifically directed to ascertaining whether an illegal act has
occurred.
c. Seek the advice of an informed expert qualified to practice law as to possible contingent
liabilities.
d. Discuss the evidence with the client's audit committee, or others with equivalent authority.
62. When the auditor knows that an illegal act has occurred, the auditor must
a. Issue an adverse opinion.
b. Withdraw from the engagement.
c. Report it to the proper government authorities.
d. Consider the effects on the financial statements, including the adequacy of disclosure.

63. When an independent auditor's examination of financial statements discloses special

circumstances that make the auditor suspect that fraud may exist, the auditor's initial course
of action should be to
a. Decide whether the fraud, if in fact it should exist, might be of such a magnitude as to
affect the auditor's report on the financial statements.
b. Recommend that the client pursue the suspected fraud to a conclusion that is agreeable to the
auditor.
c. Reach an understanding with the proper client representative as to whether the auditor or the
client is to make the investigation necessary to determine if a fraud has in fact occurred.
d. Extend normal audit procedures in an attempt to detect the full extent of the suspected
fraud.
64. Which of the following partners is least likely to be considered a "covered member" for purposes
of rendering assurance service to of Company A, a nonaudit client, performed by the head office
of a national CPA firm?
a. The partner in charge of the entire CPA firm.
b. A partner in the Cebu office of the CPA firm who maintains a small, immaterial investment in
Company A.
c. A partner in the Davao office who worked on the Company A for a different assurance
engagement in previous years, but currently has no responsibilities with respect to the
engagement
d. The partner in charge of the Davao office.

65. The factor that distinguishes constructive fraud from ordinary negligence is
a. Type of error or irregularity.
b. Intent.
c. Level of care.
d. Materiality.
66. The failure of the auditor to meet generally accepted auditing standards is
a. An accepted practice.
b. A suggestion of negligence.
c. An evidence of negligence.
d. Tantamount to criminal behavior.
67. Which of the following, if present, would support a finding of constructive fraud on the part of
a CPA?
a. Privity of contract
b. Intent to deceive
c. Reckless disregard
d. Ordinary negligence

68. In rare cases auditors have been, held liable for criminal acts. A criminal conviction against
an auditor can result only when it is demonstrated that the auditor
a. Was negligent.
b. Was grossly negligent.
c. Intended to deceive or harm others.
d. Caused financial loss to an innocent third party.
69. Privity of contract exists between the
a. Auditor and the Securities and Exchange Commission.
b. Auditor and client.
c. Auditor and third parties.
d. All of the above

70. As a consequence of his failure to adhere to generally accepted auditing standards in the course
of his examination of the ABC Corporation, Bugoy, CPA, did not detect the embezzlement of a
material amount of funds by the company's controller. As a matter of common law, to what extent
would Bugoy be liable to
Leis Corporation for losses attributable to the theft?
a. He would be liable for losses attributable to his negligence.
b. He would have no liability, since the ordinary examination cannot be relied upon to detect
defalcations.
c. He would have no liability because privity of contract is lacking.
d. He would be liable only if it could be proven that he was grossly negligent.

71. A CPA is criminally liable if he

a. Refuses to turn over the schedules or working papers prepared by the client staff to the
 client.
b. Performs an audit in a negligent manner.
c. Intentionally allows an omission of a material fact required to be stated in a financial
statement.
d. Was not able to submit the audited financial statements on time.

72. The auditor's defense of contributory negligence is most likely to prevail when
a. Third party injury has been minimal.
b. The auditor fails to detect fraud resulting from management override of the control
structure.
c. The client is privately held as contrasted with a public company.
d. Undetected errors have resulted in materially misleading financial statements.

73. A CPA will most likely be negligent when the CPA fails to:
a. Correct errors discovered in the CPA's previously issued audit reports.
b. Detect all of a client's fraudulent activities.
c. Include a negligence disclaimer in the CPA's engagement letter.
d. Warn a client's customers of embezzlement that may be perpetuated by the client's employees.

74. The concept of privity may be important in defending auditors against potential claimants.
Privity in general only allows:
a. Lenders of the client to sue the auditor.
b. Clients to sue their auditors.
c. Anyone that relied upon the audited financial statements to make a decision to sue the
auditor as long as the auditor knew or should have known of such reliance.
d. Shareholders who relied upon the audited financial statements to make an investment decision.
75. The overriding objective of the International Auditing Standards that are issued by the
International Auditing Practices Committee of the IFAC is
a. To override a country’s regulations governing the audit of financial statements.
b. To improve the uniformity of auditing practices and related services throughout the world.
c. To provide a uniform application of specific audit procedures that are acceptable worldwide.
d. To replace generally accepted auditing standards.
76. A CPA firm is considered independent when it performs which of the following services for a
publicly traded audit client?
a. Tax return preparation as approved by the board of directors.
b. Serving as a member of the client’s board of directors.
c. Accounting information system design and implementation.
d. Determining which accounting policies will be adopted by the client.

77. Jessie Garcia, CPA, forgot to test a client’s assessment of goodwill impairment during an audit.
Such an act is probably an example of:
a. Reckless professional behavior
b. Ordinary negligence
c. Due diligence
d. Fraud

78. A review engagement differs in scope as compared to an audit due to

a. The subject matter of the audit.
b. The quantity and type of evidence obtained.
c. Ethical requirements with respect to independence.
d. The users of the financial statements.

79. The risk that financial statements are likely to be misstated materially without regard to the
effectiveness of internal control is which type of risk?
a. Inherent risk
b. Audit risk
c. Client risk
d. Control risk

80. A stipulation in an agreement between an entity and its creditor that places documented
restrictions on the organization is referred to as
a. debt covenants.
b. representation agreements.
c. engagement letters.
d. current maturities of long-term obligations.

81. What is the most relevant use of a knowledge management system for an auditor?
a. Professionals may input client data and have procedures performed automatically.
b. Auditors are not required to make judgments collectively or individually.
c. Professionals may share information related to auditing, accounting standards and risks.
d. Auditors may work entirely from the firm location rather than at the client location.

82. Bea Alonzo, CPA is proposing on a prospective audit engagement for White Quack Enterprises.
After obtaining written permission of White Quack, Bea is required to perform what procedure
prior to accepting it as a new client?
a. Provide full disclosure of fees that will be billed to White Quack.
b. Contact the former auditor to ensure all disagreements have been resolved.
c. Contact the former auditor about certain matters of interest in Bea's decision to accept
White Quack as a client.
d. Contact the former auditor to determine if all fees have been paid, the change in auditors has
been approved and integrity issues have been overcome.

83. What is the most value achieved by the auditor in requiring an engagement letter be entered into
with the client?
a. Documented proof of auditor responsibility for financial statements in accordance with GAAP.
b. Multiple degrees of legal separation of the client from the auditor.
c. A locking-in of fees and timetable that must be adhered to by the client.
d. A communication and clarification of the responsibilities and expectations of the auditor and
the client.

84. The auditor commences to understand the client and related risks of the organization for what
purpose?
a. To determine the audit opinion that will be issued.
b. To determine the appropriate understanding of internal controls by management.
c. To determine the detection of audit procedures in the period under audit.
d. To determine whether the auditor has sufficient knowledge to perform the engagement/audit.

85. Kool Connections, Inc. requests that Quilab and Cabilin propose on audit services. Which of the
following is a correct assumption surrounding the result of the proposal?
a. Cabilin is required to accept Kool Connections if selected as its auditors.
b. Cabilin should interview the prior audit firm prior to releasing the proposal to Kool
Connections.
c. Cabilin may decide not to accept Kool Connections based upon the perceived risk of being
associated with Kool.
d. Cabilin will contact the PICPA and ask for a review of the proposal prior to acceptance.

86. Which of the following is typically not a significant factor that an auditor will consider in
the client acceptance of Stitch Magee Co.?
a. Brad Stitch, the president and 50% owner of Stitch Magee was investigated for securities
violations four years earlier.
b. Stitch Magee Co. is a public company in the high technology industry.
c. Stitch Magee Co. is a manufacturing company that procures much of its raw materials from the
Navotas area.
d. Stitch Magee Co. sells 25% of its inventory to Nani, Inc. which is owned primarily by Nani
Magee, the father of Stitch Magee's treasurer, vice president of finance and 50% owner.

87. In accepting a client, auditing standards suggest that the auditor focus on four questions.
Which of the following is not one of those four required questions of the predecessor?
a. Integrity of management.
b. The strength of the client’s internal control.
c. Disagreements with management as to accounting principles, auditing standards, or other
similarly significant matters.
d. Any communications by the predecessor to the client’s management or audit committee concerning
fraud, illegal acts by the client, and matters related to internal control.

88. In relation to auditing, which of the following is a correct phrase?

a. Auditing communicates results to management.
b. Auditing involves obtaining evidence regarding action and events.
c. Auditing evaluates assertions regarding evidence.
d. Auditing subjectively obtains and evaluates evidence.
89. Which of the following activities is not prohibited for the CPA firm's attestation service
clients?
a. Referral fees on audit jobs.
b. Competitive bidding on audit jobs.
c. Contingent fees on audit jobs.
d. Commissions for obtaining client services on audit jobs.
90. Which of the following statements is correct?
a. The fair presentation of audited financial statements in accordance with applicable financial
reporting framework is an implicit part of the auditor’s responsibility.
 b. Professional judgment can be used as the justification for the decisions made by the auditor
that are not otherwise supported by the facts and circumstances of the engagement or
sufficient appropriate evidence.
c. Appropriateness is the measure of the quality of evidence, that is, its reliability and
persuasiveness.
d. Most CPAs, including those who provide audit and tax services, also provide consulting
services to their clients.
91. The audit work performed by each assistant should be reviewed to determine whether it was
adequately performed and to evaluate whether the
a. Audit procedures performed are approved in the professional standards.
b. Audit has been performed by persons having adequate technical training and proficiency as
auditors.
c. Results are consistent with the conclusions to be presented in the auditor's report.
d. Auditor's system of quality control has been maintained at a high level.

92. Which of the following is not a document or record that should be examined early in the
engagement?
a. Corporate charter and by-laws.
b. Contracts.
c. Management letter.
d. Minutes of board of directors' and stockholders' meetings.

93. Philippine Standards on Auditing require auditors to assess the risk of material misstatements
due to fraud
a. For first-time audits.
b. Sufficient to find any frauds which may exist.
c. For every audit.
d. Whenever it would be appropriate.

94. A measure of the auditor's assessment of the likelihood that there are material misstatements in
a segment before considering the effectiveness of the internal control structure is
a. Inherent risk.
b. Acceptable audit risk.
c. Statistical risk.
d. Control risk.
95. Which of the following terms relates to the embezzling of receipts?
a. Misrepresentation
b. Misapplication
c. Misappropriation
d. Manipulation
96. Which of the following fraud risk factors relate to misstatement arising from fraudulent
financial reporting?
a. Personal financial obligations may create pressure on management or employees with access to
cash or other assets susceptible to theft to misappropriate those assets.
b. Adverse relationships between the entity and employees with access to cash or other assets
susceptible to theft may motivate those employees to misappropriate those assets.
c. Inadequate internal control over assets may increase the susceptibility of misappropriation
of those assets. For example, misappropriation of assets may occur because there is the
following:
d. Recurring negative cash flows from operations or an inability to generate cash flows from
operations while reporting earnings and earnings growth.
97. Which of the following concepts of materiality is incorrect?
a. Materiality is based on quantitative and non-quantitative factors.
b. Materiality is a matter of professional audit judgment.
c. Materiality does not apply if internal control is highly effective.
d. Materiality is more closely related to the fieldwork and reporting standards than to general
standards.
98. Which of the following does an auditor least likely perform in assessing audit risk?
a. Understand the economic substance of significant transactions completed by the client.
b. Understand the entity and the industry in which it operates.
c. Gather audit evidence in support of recorded transactions.
d. Obtain an understanding of the client's system of internal control.
99. The risk of fraudulent financial reporting increases in the presence of
a. Substantial increases in sales.
b. Incentive systems based on operating income.
c. Improved control systems.
d. Frequent changes in suppliers.
100. In designing written audit programs, an auditor should establish specific audit objectives
that relate primarily to the
a. Financial statement assertions.
b. Timing of audit procedures.
c. Cost-benefit of gathering evidence.
d. Selected audit techniques.